Who: Christine Heckart, General Manager, MSTV Marketing
Who: Christine Heckart, General Manager, MSTV Marketing
When: September 20, 2006
Where: Microsoft - Redmond, Washington
JOE BINZ (Investor Relations, Microsoft): Welcome, everyone, and thanks for
joining us for today's Live Meeting on our Microsoft TV business.
Before we begin, I'd like to cover the following administrative details: Today's
presentation may include forward-looking statements based on our current
expectations and assumptions about the business. These are subject to risks and
uncertainties. Our actual results could differ materially because of risk factors we
may discuss today, and those identified in our most recent 10-K and 10-Q. We don't
undertake any duty to update forward-looking statements.
As always, a replay of this Live Meeting will be made available at the Microsoft
Investor Relations Web site.
I'm pleased to be joined today by Christine Heckart, General Manager of Marketing
for the Microsoft TV business. In her role, Christine is responsible for partner
business development and worldwide marketing activities, including market
research, strategic planning, and product management.
Christine joined Microsoft just over a year ago, prior to which she was the vice
president of marketing for Juniper Networks.
Format-wise, Christine will provide an overview of Microsoft TV, as well as a brief
update on our IPTV initiative. We'll then use the remainder of the time to field your
Please note that only those of you participating via Live Meeting will be able to see
the presentation slides and submit questions. We ask that when you submit your
questions via Live Meeting you also include your name and firm. I'll then read the
questions for Christine to answer. We may not have time to answer all the
questions, so if you have any further questions following the call, feel free to contact
Investor Relations, and we'll be happy to follow up with you.
So with that, it's my pleasure to turn the call over to Christine.
CHRISTINE HECKART: Great, thanks, Joe.
Hi, everybody, and thanks for tuning it today. We're going to talk about one of my
favorite topics right now, which is IPTV. I thought what we would do is I'll spend 15
or 20 minutes on some prepared remarks, mostly just trying to make sure we're all
on the same page for what Microsoft TV is, where we fit within the Microsoft family,
and a lot about why we're excited about this market, and what we're bringing to it in
terms of value.
Then I'll open it up for Q&A, because I think the most value of this session is likely to
come out of the second half where we can respond to your specific questions.
So let me start just by making sure we're all on the same page for where Microsoft
TV fits. As you guys know well, if you follow the company, we've got three different
business units: The platform products and services division includes the Windows
client business, server and tools business, as well as the MSN business. The
business division is all the software that's built on top of that. And then we have
entertainment and devices. And it's in E&D that you'll find Microsoft TV.
E&D breaks down into four main areas: The communications group is the Mobile &
Embedded Devices group. Productivity is where we make good money on all of the
peripherals that we offer as Microsoft. The gaming group is the Xbox team, which I
think you're well familiar with. And then there's this new group that we launched
last year under Bryan Lee, which is our entertainment group. And Microsoft TV is
part of entertainment, along with Zune and eHome.
And Microsoft TV has two main products that we take to two main markets, and it
gets a little more complicated than that, but for right now to be simplistic we have a
cable product, which we call Foundation Edition (FE), we sell it into the cable
industry, and we have an IPTV product, which has the entertaining name of IPTVE
for Edition, and we sell that to telcos around the world. And what we really want to
spend most of the time talking about today is the IPTV market for telcos.
So I thought a good place to start the discussion would just be to have a foundation
of what we think of as IPTV, what's in and what's out of that, because you hear
Internet TV, Apple's got this new ITV, which I'm sure will be suitably confusing for
the market, we talk about IPTV. So not that there's a right or wrong, but let me just
share the way we think about it.
For us, IPTV is about a managed IP network over which we can deliver a managed
video service. And we is not Microsoft, it's Microsoft in conjunction with the service
providers who own the consumer and package up all of the content and deliver it as
part of the service.
IPTV is all about delivering the kind of television you know and you're used to today,
broadcast TV, video on-demand, et cetera, to your TV set. It's not about Internet on
the TV and it's not about TV on the PC.
Internet TV is something different. I'll take you through the architecture for IPTV.
Internet TV can be part of that architecture, but it's really not the foundation of the
architecture. The foundation is an IP, a managed IP network.
So the main components of IPTV are any kind of content that you're ingesting. That
can be live broadcast, it can be videos that you're going to offer on-demand, any
kind of content, radio, et cetera.
A service provider will take those off satellite, airwaves, fiber network, however
they're bringing that into their head-end, and then they will store that typically on
And there's a wide variety of servers in the Microsoft TV architecture, and, in fact,
just the server infrastructure brings with it a lot of opportunity for Microsoft. We are
using Microsoft’s Windows Server and SQL and MOM and SMS and lots of very
traditional Microsoft products in the head-end and in the central office to deliver IPTV
to these service providers.
And that's interesting because it really takes very traditional Microsoft server
technologies into the service provider infrastructure, which is a new opportunity for
the company, it's not a place where we've had a lot of business to date. So there's a
lot of interesting opportunity for Microsoft just in the server infrastructure.
Then we also deliver that over what would be the last mile infrastructure, all the way
out to the home, and there's a software component that sits on a client, which is the
set-top box, out at the subscriber's home.
So those are the main elements of delivering a basic IPTV service.
What you don't see in that diagram, but what is important to remember is this is
basic IPTV. Once you have this infrastructure in place, you can leverage the content
and the back-end server infrastructure to deliver content to mobile subscribers, if
you're a service provider with a mobile offering. You can blend in what would be
called over-the-top video services off of the Internet. You really take the TV and you
make it part of a two-way IP network, and any other part of an IP network can also
participate in this ecosystem.
So that's the grounding on kind of how we see IPTV, what it is and what it isn't.
We're excited because there's about 1.6 billion TVs in the world today. There's a lot
more TVs still than there are PCs, and a lot of ways that you can reach consumers
through those televisions.
If you look at different market research, you will find that around 30 to 40 million in
subscribers are predicted over the next couple of years, and the revenues in the tens
to multiple tens of billions of dollars. Depending on which research you look at, and
I know many of you guys do your own, you'll see anywhere from very conservative
to pretty standard estimates that result in compounded annual growth rates in the
hundreds to thousands of percent a year over the next couple of years. And it's a
big market, it's a Microsoft size market. So we're excited because there is a very
real opportunity here in a very fast growing market.
So let's talk about what's better with IPTV. IPTV can and will transform a couple of
industries. It will transform the service provider industry, potentially in some
fundamental ways, and it will transform the entertainment industry. And somewhere
along the way it has opportunities to transform advertising, which you could think of
as its own industry or part of entertainment.
There's a lot going on. It starts with delivering better TV. The killer application for
TV is still great television, it's great content, and IPTV offers unbelievably good
quality. You don't really have limitations around the number of channels you can
offer and the number of channels in high definition. You really can bring almost
unlimited choice to consumers in a way that you can't do with broadcast oriented
You can deliver this content across a wide variety of devices. You can really
personalize it. And while we don't see in the short term self-publishing being an
important part of the landscape, I do believe that over the next three to five years
we'll see the two-way capabilities of IPTV really come to light in self-publishing of
content, much the way we saw happen on the Web once we had basic Internet
access delivered to people's homes.
There's also better control over the experience, you can personalize it. With
Microsoft's IPTV solution we build DVR capabilities right into the service architecture
from the ground up. And that has some really interesting side benefits like search
and discovery. For any of you that have tried to find a particular piece of content, a
particular movie or a particular favorite show on existing services today, you'll find
that search is typically not very user friendly and not very rich. And with the
Microsoft IPTV service you can search any content. We treat it all the same, whether
it's live TV, favorites that you've recorded and stored, any number of video on-
demand titles; you can search it all with the same search function at the same time,
and it serves it up to you in a very intuitive and easy to use manner. Search is one
of the things that when we do our usability study, it, along with picture-in-picture
technology for browsing channels, and instant channel change are the three things
that often pop to the top as what users really notice and enjoy about the service as
soon as they put the remote in their hand.
Then there's also opportunities for connectivity. That means sharing media in the
home across a variety of devices, and integrating in other forms of communications,
and over time I believe that community and commerce as well will become important
parts of the IPTV experience.
So there's a lot of hype about TV becoming a more connected experience. And a lot
of that hype will be reality in a pretty short amount of time. Already today Alcatel
can show you an application that they've built on our platform that lets you remote
record from a cell phone to a television, or take a picture on a cell phone and send it
directly to any TV set. We've got applications that allow you to remote record from
your DVR on a PC.
The truth though is that the essentials of the experience of just watching great TV
are still the key drivers, they're the main requirements of the market short term. In
all the research that we do in our usability labs, that's what people gravitate to, just
give me a better TV experience. And people aren't terribly unhappy with their TV
service today, which makes for a pretty interesting marketing challenge for service
providers, but one thing that has held true over the last couple of years of the
research we've done on this system is once people see it or experience it
themselves, there is a noticeable difference and advantage, and they become very
interested in the service. So the interest rates, the take-up rates that both AT&T,
Verizon, BT and others are seeing in their early market trials show that there is a
meaningful and measurable difference.
One of the things that Microsoft has had to do is build a pretty substantial ecosystem
to allow the end-to-end delivery of this service. So the parts of the ecosystem that
we've concentrated most on to date are the encoders, the servers, and the set-top
boxes, among some other things, but those are the really key components in the
ecosystem right now. And this is a reasonably fair representation of that ecosystem
today. I don't have Phillips on here, and there may be a couple of others, but this is
the majority of vendors that you'll see delivering those parts of the ecosystem.
Over time this is an open platform, the Microsoft TV platform is designed to be open
both to hardware vendors, as well as to applications developers, and we want to
bring the world's talent into this market and allow them to innovate on the platform
and to develop new applications on the platform and to extend off of the platform in
new and interesting ways. So one of the things that we should expect is to see this
ecosystem broaden and enrich itself over time.
One of the questions that I get asked a lot, so I thought I'd just try to treat it
proactively here, and we can come back to it in the Q&A if you have more questions,
I get asked about competition, who does Microsoft compete with in this space. And
it's a really difficult question to answer, because Microsoft right now is the only
provider that brings together five or six different elements that without Microsoft you
could go do or buy individually, but you'd have to bring them and systems integrate
them all together, and then you'd have to synch those roadmaps over time.
So what Microsoft does is we bring in, we ingest content, we use something called an
A-server, an acquisition server, and that A-server not only ingests the content but it
also sends out the multicast stream, which you can join when you're trying to watch
an individual channel in your home.
In addition to that, we do a VOD architecture, video on-demand architecture. We
have something called a D-server, which does unicast of traffic, which is part of how
we've been able to deliver this instant channel change experience.
We have subscriber management capabilities, we do the guide, including bringing in
all of the metadata, and then using that to serve up a very rich guide in the form of
the client on the set-top box, so that users know what's available to them. We have
our own integrated security system version of Microsoft's DRM, and then the
management that goes over the top of that.
So you can pick most of those individual areas, and you can find individual
competitors, there's a ton of competitors in the VOD space as an example, but there
isn't anybody in the market right now, besides Microsoft, that brings it all together.
And in very mature markets, service providers are more comfortable in systems
integrating a lot of pieces themselves. In early markets they're typically less
interested in doing that, they're more interested in trying to get to market with some
best in class capabilities quickly, which is I think one of the reasons why Microsoft
has gained such traction with the world's largest providers so quickly. Plus TV is a
very different competency for these providers, and it's something that Microsoft has
been investing in for eight or ten years. So having world class talent that
understands encoding and video delivery, that in and of itself is a huge benefit.
The other thing that's really hard about IPTV and that doesn't show up on this slide,
but is nonetheless incredibly important, is television is a deterministic application,
especially live TV, and IP is a non-deterministic network. So making something like
television work over IP is a nontrivial task. You have to not only really understand
how you deliver TV over any infrastructure, but you also have to understand IP and
IP networking. And there are some pretty substantial barriers to entry as people
seek to enter this market because it is growing so quickly.
So there is a lot of interest in this around the world. You guys are at least as familiar
with this as I am. I've gone around the world a couple of times now and met with
most of the top service providers, all of our customers, and then many prospects, to
really understand what's driving their business. And there is so much interest in this
for a couple of reasons. Service providers are wanting to transform their business
model and entertainment is a key piece of that, and they also want to deliver triple-
play services, so it's not just about entertainment, it's about a bundle of services to
help lock consumers in and make churn of the base more difficult.
So you see the world's largest providers that are currently customers of Microsoft's
IPTV service, or in the case of Verizon kind of an interesting hybrid product, and
there are others around the world, I guess we have Reliance on here over in Asia,
that are either in the IPTV market as well or will soon be entering.
So this doesn't represent everybody out there that's doing IPTV, but it is a good
representation of the Microsoft customer base right now, and is collectively
representative of a very high percentage of the world's users of residential fixed
access lines and of DSL services, so a very large percentage of the world's population
can be reached through this pretty small number of service providers. We've
announced so far about 14 in all, and that's not inclusive of the service providers
that we've won jointly with Alcatel, and they've been very active in this space.
One of the reasons that service providers like the Microsoft solution is it's designed
to really let them customize an experience for their consumer base. And that means
things as simple as re-skinning the offering, and I'm going to show you a couple of
skins, all the way up to developing their own applications or having third parties
develop applications on top of the platform that are interesting and unique to their
So this is the AT&T Uverse skin, and I also have included the Club Internet skin.
Club Internet is a brand of T-Online, DT's T-Online operating in France. So Club
Internet is the way that they go to market in France. Club Internet has been
offering a Microsoft-based IPTV service since summer of this year, and they're
having a lot of success.
So two very different ways to skin the product, they're the only two that I included in
this case. I show Club Internet here going to market in France. You can walk into
any of the main retailers in France and find the Club Internet offering there, as well
as Microsoft TV. And in this case we go to market jointly, so the Microsoft ingredient
brand is pretty prominent.
The last thing I thought I'd hit on in terms of prepared remarks, then we can shift
into Q&A, is this market itself. The pay TV market is huge, but it hasn't been
growing very rapidly in some countries. In the U.S. it's a pretty mature market.
Germany is still growing at a reasonable rate, but in the UK it's a pretty mature
market; other parts of the developing world the market is growing rapidly.
But the fact that the paid TV market itself isn't growing rapidly doesn't mean there
isn't a big opportunity for telcos as they enter the market. One of their opportunities
is just pure share shift, and another opportunity is in growing the pie.
We just completed some research with Mercer, and I'm not including that whole
study here, although I'm happy to spend more time on it either in Q&A or in calls
that Joe can schedule, but a couple of things that were interesting that came out of
that, this study was just U.S.-based. I don't have back yet the results from a
worldwide market study that we're doing right now. I will have that in a few weeks,
and hopefully we can get back together and talk about the results of that worldwide
But right now for the U.S. we're seeing that if a service provider were to enter this
market with a competitive TV offering, and competitive meant you can get basically
the content that you're used to today with integrated DVR service at the same price
that you pay today, the service providers can pick up low double-digit share of the
market, just for coming to the party. And frankly that will keep them busy for a
while, because that's a reasonably healthy place to start.
So while they have to start from zero and work up, there's at least 13 percent of the
market that feels inclined to shift to a telco provider that doesn't have a better
experience, doesn't have a lower price, doesn't have anything that differentiated,
just has a competitive offering.
What we wanted to find out in this study was something a little bit more interesting
than that initial share shift. We wanted to find out what it would take to drive their
share up, if it would take reducing the price. One of the things that we would rather
not see happen is that with more competition in market, that we see ARPUs decline
dramatically. We think there's a lot of innovation to be brought to this market, and
we'd like to see the telcos and the cable companies both have enough profit that
they can invest in ongoing innovation in this space.
And one thing we found interestingly enough here is a 10 percent decrease in price
could get the providers up into the 15 to 18 percent share range, if they didn't do
anything else but just drop the price. However, if they kept the price the same, they
didn't drop the price at all, they kept the price the same, but they added some
additional features -- and we tested nine different features, I can share those with
you, but they were things like caller ID and remote record and having information on
your PC available to tell you about the shows that were on that evening, and a
variety of other not very difficult to deliver features -- that just the added features
were enough to drive a 20 percent share take for the service providers without
having to lower the price of the service at all.
So that's very encouraging, because it says that for a reasonable percentage of the
market there are still capabilities that they're interested in and want, and those
capabilities are more attractive than just having a lower price.
We also found that there are a number of different ways to grow the pie. So if you
just share shift, that's interesting, but what you guys I think are looking for is, is
there a chance to really make the market itself bigger? And the answer to that is
absolutely yes. There's a number of ways to do that. The one that I'm sharing here
is the easiest and least controversial. You can talk about commerce, you can talk
about new ways to do advertising, you can talk about new ways to do
communications and community-based offerings; all of those are things that don't
really exist today, and could dramatically grow the market. But if you want to look
for something that exists today that is very tangible, and the risk isn't that high, you
can look at the video spend that people today are already shucking out. Money to
rent movies, to go to the theatre, to buy DVDs. And there is a lot of money that's up
for grabs, and an average of $37 a month per household is being spent in this
Now, we don't believe, and the research didn't show that we could grab all $37,
that's not reasonable, but with a variety of different packages, and it almost didn't
matter which package you used, we could show that service providers could take at
least a couple of dollars a month, so anywhere from, say, $5 a month up from there
into the low teens by the ways that they packaged video offerings.
So we think we can share shift not just from the pay TV market, but from the
broader entertainment market into this market for the service providers, so really
interesting ways for them to continue to add to the ARPUs of their subscribers.
So I'll wrap it up. You can read the summary remarks here as well as I can. I'll
summarize this by saying that TV itself is really in transition, what we think, what we
want from TV. The service provider industry is undergoing transition, the content
industry is, the advertising industry is; and one thing that you can find as a similarity
across all of those industries is that software is the driver, software is the
differentiator, software is what matters. And there is no company that's better
positioned to take advantage of an opportunity in software than Microsoft is.
And there's billions, literally billions of dollars of market opportunity here for
somebody to win and possibly others to lose. Microsoft is extremely well positioned
in the IPTV space, and in the adjacent markets that you can tap once you have that
IPTV foundation in place.
So it's a super exciting place to be right now, fraught with a lot of questions, if
nothing else, and a lot of excitement. So I'll go ahead and end these prepared
remarks and open up to the questions that you guys have.
JOE BINZ: Okay, thanks, Christine.
Our first question comes from Nikos from UBS, and he's interested in any comments
we have on industry views that Microsoft IPTV software requires a server for 100 to
150 homes to implement fast channel change. In doing so, can you comment on the
ability for the software to scale?
CHRISTINE HECKART: Yeah, great question, thank you, Nikos.
There were a lot of very legitimate concerns I think about the scalability of the
platform a couple years ago, and even when I joined a year ago, it was one of the
big things that I dug into before taking the position, because there had been a lot of
rumors about scalability. And I don't remember the hundred, but there literally was
an article written that said something like it took three servers for every one
subscriber, so it wouldn't surprise me to know there was one that said a hundred.
The hundred is not true, and it depends a little bit on the architecture. You can dial
certain things up or down, like the amount of HD, the number of clients, set-top
boxes per home, the amount of on-demand video that is likely to be served up, and
it will change the scalability numbers a little bit.
But right now the system is delivering usually in the, say, 500, 600, 700 per
subscribers per server set, so there's a number of servers that you need in order to
serve up one user, and then how many will that scale to.
So scalability up today is not the problem; we're hitting all of the metrics that we
initially thought to hit, and that the business cases are based on. And we know that
we can improve upon those; in fact, we've just recently added both IBM and HP into
the ecosystem. They both have brought some innovation into the server
architectures that have reduced costs further, and the cost of the hardware itself is
really dropping. When I first came on, I think it was about $3,500 a server on the
market, and now you can buy that same server for about $2,500.
So there's lots of ways that we can improve upon it. The scalability is already solid,
it's already meeting the metrics that we had set forth as objectives, and we can
improve upon it. Scaling up is not the concern that I have today. If I got out and
talked to service providers a year ago or a couple years ago I would have had a lot
of questions, and we had a lot of questions, about scalability and also about security.
You never hear about either of those now, scaling up isn't a concern and security
isn't a concern.
However, scaling down is a question. I don't yet know, and we haven't stress-tested
how low this can go. And this year that's not such an important question, and
probably next year even it's not a super important question, but as we want to drive
this into more and more markets, as we want to take this into the tier 2 and tier 3
providers, then we do have to understand how low we can go, you know, can we
support hundreds of subscribers per server, can we get everything that we would put
today on specialized servers, which is required for scaling up, could we put all of that
on a single server required for scaling down. We think the answer to that is yes, but
we haven't put the kind of effort into the scaling down question that we have into the
scaling up architecture, so it's hard for me to know where to draw the line.
JOE BINZ: Okay, thanks.
Our next question comes from Jonathan Curtis regarding the Wall Street Journal
article on Verizon from the past week, and he asks, "Which elements of the IPTV
solution being deployed at Verizon has Verizon had to develop on its own, and do
you know why they felt this was necessary?"
CHRISTINE HECKART: Okay, so first of all, Verizon is not deploying an IPTV
architecture. So there were a number of inaccuracies, I lost count at about 12, in
the Wall Street Journal article. And we've called them and we've gone over what we
believe were just kind of blatant inaccuracies.
Verizon is deployed on a unique hybrid architecture that's built on our FE product.
So remember at the very beginning of this we talked about Microsoft TV having two
products, one for cable, one for telcos. Cable is the FE product, and then the telcos
are generally using IPTV.
Verizon has neither of those. Verizon has a special product that we built for them
that is based on the FE product, but it has an IP back channel so that you can get
some parts of a two-way experience and two-way communication using IP, but still
using a com-based delivery system, which is their current architecture. So they
have a very unique offering.
That product, similar to our FE product and our IPTV product, is designed for service
providers to be able to write their own applications on top of that, and that was part
of Verizon's strategy from the beginning. At least for the year that I've been here,
that's always been an explicit and open part of the dialogue we've had with them,
and it's been an explicit part of their strategy.
So they will continue, I believe, to innovate on top of that platform. Right now they
are enjoying pretty amazing success in the market with Fios, I think certainly more
than they predicted. We're very happy to see it.
I do surveys on their customer base in terms of how satisfied the users are with the
Microsoft experience that we're delivering with our parts of the software, which
include the user's guide, and the satisfaction levels are very high with that service.
So there continue to be innovations that we want to deliver to Verizon that they can
take to market. In fact, one of those recently just came out, which is Whole Home
DVR, and Verizon is now the only provider in the market with Whole Home DVR
capabilities, and that was one of the innovations that Microsoft delivered to them.
So I would see that we continue to have an ongoing partnership with them. I
absolutely anticipate that they continue to innovate and develop on top of the
platform. I hope all providers do, but I know it's an important part of the Verizon
I think every provider is going to have to decide how much they're going to insource
and how much they're going to outsource, and outsourcing can be other third parties
besides Microsoft for developing applications, and typically will be on the applications
front, as well as how much of their own systems integration and underlying
components that they do.
Most service providers don't have that competency, they don't believe they can
attract the world's best, and they want to take something that one company can
develop and then share the cost because the cost to develop this is pretty expensive.
Microsoft invests a lot of money in bringing world class software to this market, and,
of course, we can share that over a wide number of providers. So I would anticipate
they're all going to do some level, and Verizon will be no different.
JOE BINZ: Our next question comes from Rick Sherlund, and he would like to
know, "Are the cable companies able to offer this, or just telcos, given that cable
does not have an IP network? Will cable deliver IPTV as well over time?"
CHRISTINE HECKART: Yeah, and that's a great question. You can answer that
yes and no. Cable companies can do many of the things that you can do with IPTV
over a combination of a broadcast cable network with a back channel IP network.
And most of the big cable companies have been investing in IP networks for a long
time, so they have that infrastructure.
You can't do everything. With IPTV you're really turning the TV into a two-way
receiver. The TV has not been part of the digital age, and it really was left behind.
And with IPTV you are bringing it full into the digital revolution, you're making it part
of a two-way network, and you can do things as a result that you really can't do any
So over time I think you'll see that cable companies will look at IPTV and when it
makes sense for their network and their shareholders you may see them start to dip
their toe in that water, but right now they've got huge investments in their cable
infrastructure, they can bring many of the same advantages using a back system
based on IP, and I think you'll see the two industries continue to be different in those
underlying infrastructures for a while.
JOE BINZ: Our next question comes from John Hodulik of UBS, and he asks, "A
recent article suggests that Verizon developed their own EPG instead of going with
Microsoft’s product. What did Verizon not like about the Microsoft product?"
CHRISTINE HECKART: That would be I think the Wall Street Journal article, the
same one that was mentioned earlier. That article had a number of inaccuracies.
The Verizon product is based on the Microsoft EPG, the Electronic Program Guide, as
well as a number of other aspects of a special hybrid product that we developed and
delivered to them.
I think Verizon does like the EPG. I think their customers love it, and that's borne
out both in the rate of subscriber ramps that they're having on the service, as well as
the feedback from the subscribers that use the service.
So I don't believe that Verizon is unhappy, but I'd let them speak for themselves on
JOE BINZ: Okay. Sid from McAdams Wright Ragen asks, "Can you talk about the
IPTV revenue model, and various related revenue streams for Microsoft associated
CHRISTINE HECKART: Yep, good question, Sid.
So this is a subscriber license model much like other software. So we charge a
license fee, a client and a server license fee for each subscriber. And what we've
done is we've been able to package together into one license fee a number of
different underlying Microsoft technologies like the WinCE, Windows Server, SQL,
MOM, and our own Microsoft IPTV software, so all that gets packaged into a
And the way that, if you're looking for kind of how do you tell whether or not
Microsoft is doing well financially, since we don't disclose revenue down to a per
business unit level, what you would look for is the rate of subscriber ramp. So the
more subscribers there are on the services around the world, the more revenue that
we'll make over time. It's not exactly linear, but it's near enough that it will give you
a good flavor for the health of the business.
JOE BINZ: Our next question comes from Andy, and he asks, "Does this platform
assume delivery over the open Internet or dedicated IP networks?"
CHRISTINE HECKART: So if you remember one of the very first slides that I
showed you was that end-to-end architecture, IPTV the way Microsoft talks about it,
and it's not that it's right or wrong but just the way we view it, IPTV is really about
delivering live TV and video on-demand and other services over a managed IP
network, not over the open Internet.
Now, that's the basic architecture, and that lets you deliver a very high quality
service, pay TV service to subscribers. It doesn't prevent you from also offering
what could be called over-the-top. Over-the-top is a variety of different things kind
of lumped into there, which means delivering Internet like services and Internet like
quality and video downloads and anything else you want to think of to over an
Internet-like service to your television. It does allow the TV to participate in the
larger Internet community if the service providers want to open up their offerings in
that way. And most of them are looking at how they will blend together the
managed IPTV service, great television to your TV set, with Internet like offerings,
including over-the-top video services, as well as mobile, as well as some other
So over time I think you'll see all of them coming together into an architecture, but if
you were talking just about IPTV, it's about managed IP services.
JOE BINZ: Our next question comes from Scott Coleman of Morgan Stanley.
"What, if any, are the middleware related technical hurdles to delivering high def,
DVR, and fast channel change? And of the carriers you're currently engaged with,
how many offer one or all of these services?"
CHRISTINE HECKART: So good questions, Scott, a lot is lumped in there.
And all of them offer all of those that you named. Each of those is part of the
Microsoft TV experience, the user experience that we deliver.
And you asked about what are the difficulties in the middleware. I don't think of it in
terms of just a middleware component, so I guess it depends maybe on how broadly
you're using that term. But the difficult parts are some of the things that you
mentioned, how do you just do something as deterministic as TV over a non-
deterministic network like IP, and that's pretty hard. HD itself proved to be pretty
difficult. If we were to go back, rewind to say this time last year, HD was hard. And
one of the reasons that we transitioned the ecosystem from a basic Intel-based
chipset to a system on a chip, a custom piece of silicon called a SOC that we have a
reference architecture for, and Sigma and some others are delivering as part of the
set-top box, was in part to get the kinds of very rich video experiences like HD
delivered via software onto a television set, and to be able to do that, do something
like sports, very fast moving in high definition.
So it is in part the software, but it's the entire ecosystem from the encoders, you
know, it takes new encoders to do HD, all the way down to the silicon, and just
about everything in between.
And if you look at what this industry has done, in three years basically it has
duplicated almost 60 years worth of television innovation, if you go back to the early
'40s and the first RCA television, and all of the innovation that has taken place in the
TV market over that period. So it has not only brought all of that onto an IP
network, but it has improved upon it. There is now instant channel change, tuner-
less TV really, so tuner-less picture-in-picture, unlimited channels that you have
access to, and the ability to have this HD content, and pretty much unlimited HD
content, as well as the ability to move into this very two-way not just content-
centric, but over time communications, commerce and community-centric
JOE BINZ: The next question is from Dylan Moore of Robert Baird, and he wants to
drill a little bit on the SOC issue. "Sigma Designs and STMicro have been selected as
partners for the Microsoft IPTV Edition software platform. Are these chips far along
or are there things that still need to be worked out for each, like additional
CHRISTINE HECKART: Yeah, in the case of those two chip vendors, they're
developed. They're all ready, the software is ported to them, they're working inside
set-top boxes, the set-top boxes are being delivered to service providers, the service
providers are delivering them to market.
However, we do want to bring more silicon vendors into the ecosystem. So we have
not yet opened up the ecosystem beyond those two SOCs that you mentioned.
Those are working well. I don't want to say no issues, because we'll continue to
innovate with them, but for the software that we have today delivered on the SOC
through the existing ecosystem, no show-stopper issues there, everything seems to
be working well.
Again, if you go back a year ago, there were a lot, it was hard to get the reference
design up and running on the software, make HD work, just a ton of man hours went
into that, but no issues right now.
JOE BINZ: We have a follow-up from Nikos. He asks, "Do you view the regulatory
issues in Europe right now regarding unbundling new broadband networks as
pushing back the timing of IPTV deployments? Can you provide any insight into
CHRISTINE HECKART: Yeah, that's a great question, and I don't -- Nikos, I don't
think that they will push back. I think you'll see, you know, DT has said late last
year, early this year that they were planning to launch in several markets the second
half of this year; they're on track to do that. So I don't think you're going to see it
turn back the clock or slow down the progression of getting the services to market.
However, I don't think it's a very favorable regulatory climate right now. I do think
it will cause DT to really look at their investment model, what they can afford to
invest in, how much they're going to have to open up, what kinds of innovations that
they can uniquely bring.
So it's a very challenging environment for them right now, but it's also a market
that's evolving in real time. I'm over there at least a couple times a quarter, and
every time I'm there there's something pretty material that's changing. So I think
that we'll continue to see a pretty fast pace of evolution. I'd like to see it move
beyond where it is today. I don't think it's in the best environment for us or DT. But
where it is right now I don't think hampers them from being successful, I just think it
makes it a little bit more difficult.
JOE BINZ: And a follow-up question from Rick Sherlund: "Can we get a sense for
how rapidly this gets deployed, and what are the constraints to broad adoption in the
CHRISTINE HECKART: Yeah, Rick, that is the question. That's the issue that we're
all dealing with. We can deliver the best possible TV experience, and then once you
have that, and I believe we do have that today, how do you get that to market? And
there's a couple of things that I think are going to be key. One is just the physical
networks; you know, we're going to march behind physical infrastructure deployment
that AT&T, BT, DT and others are investing in, upgrading their networks so that they
have the capacity to deliver live TV and video on-demand and other interesting
services to subscribers.
So just pure physical infrastructure will be a gating factor over the next couple of
years. They are going fast, they're really upgrading on existing DSL infrastructure,
so they've got a pretty good paved highway to work from, and I think they have
good competencies in how to do this quickly. But you can't get the service where
you physically can't reach the consumers with the network, so that's one thing that
we have to look at.
The second is once you can reach the consumer, what causes the consumer to want
to shift. And that's the question that I spend, and my team spends a lot of time
researching. And I don't think we have a magic bullet yet. One of the things that
we're doing is a worldwide market segmentation study, because certain segments
are going to move faster than others, and they're going to be interested in different
things. We have to understand that first and better than anybody, and we're in the
process of really digging into that right now.
One thing that we have found that's really encouraging is if you just get the
experience in front of people, if you give them the remote control and give them five
minutes, they walk away loving it. And we've had service providers in this country
and other countries do demos in their retail presence, their areas of retail presence,
and they get people that are walking off the street and they might be coming in to
buy a cell phone or coming in to buy some other service from the provider, and the
service provider has their TV offering their. Once you get that -- and they're not
even a customer at that point, they're somebody walking in off the street -- once you
get them with the remote in their hand playing with it, the interest level, the people
who say, "Yes, I'm interested in learning more about this service and whether or not
it's available to me" is very high, well over 50 percent. That's amazingly
encouraging. I've been involved, I've spent 20 years in this industry; almost every
one of those years has been on the forefront of a brand new market. I've never
seen interest this early in the market be that high. People love the experience once
they have it.
So I think the marketing challenge is getting people to experience it, and AT&T has
been doing that with Tupperware parties and parties in people's homes and in their
neighborhoods and showing it off in public places. BT and DT are doing similar,
slightly different but very similar things. And that's going to be the hard part, just
making people aware. In the research that we've done there's a high percentage of
consumers in the high teens that aren't even aware that they have a choice today,
cable or satellite. They’re just not paying attention to what's available even now. So
how do we make the user experience, how do we make better television something
that people want? And that's going to be the hard marketing challenge, and that's
something that Microsoft is interested in helping with and raising the awareness on,
service providers are interested in doing that, and I think cable companies ultimately
will be over time as well, because once people become more engaged in the
experience, we really can make the overall pie bigger, it won't just be about share
shift, it will be about market size gains.
JOE BINZ: Our next question comes from Tim Daubenspeck and he asks, "How are
you prioritizing the communication equipment vendor relationships between Alcatel,
Cisco and/or Juniper? Do each of these vendors have the same access to Microsoft
code and feature roadmap?"
CHRISTINE HECKART: Good question. The simple answer is, no, they don't. We
have a preferred relationship with Alcatel, they are a preferred go-to-market partner.
They bring kind of the whole package of all the different underlying parts of the
network, plus our software, plus the system integration around that, and they have
applications that can ride on top of it. So they bring a very comprehensive package,
and we have a pretty unique relationship with them in the market.
Cisco also is an important partner of ours, particularly today in the set-top box area.
So Cisco bought Scientific Atlanta, and they bought KISS. Both of those are
important set-top box ecosystem partners. They're being deployed in various parts
of the world right now. And Cisco also provides some of the underlying, they don't
provide the same components that Alcatel does, in some cases they overlap and in
other cases they don't, but Cisco routers are very well entrenched in the market.
Juniper is in the backbone.
And in almost all of our deployments it's a very heterogeneous environment. You
might have Juniper doing the security system, Cisco doing parts of the underlying IP
network, Alcatel doing the entire end-to-end IPTV piece, and the access piece.
So we won't see any one service provider that has the same architecture, it will be
similar but different. We'll see very heterogeneous environments. We will need to
know how to interoperate with and work on all of them, and Alcatel will remain the
preferred go-to-market partner, and system integration partner.
JOE BINZ: Okay, we're going to take two more questions. The first question comes
from John, and he asks, "What is the minimum broadband bandwidth requirement
needed to support high dev TV on IPTV?"
CHRISTINE HECKART: Oh, good question. So because you said high def that's
going to change the nature of the answer. The kind of minimum needed just to
support TV is about 3 meg, and we've got service providers in various parts of the
world that are delivering a TV-based service on a 3 megabit network. Now, they'll
go up from there, but that's their minimum.
Once you get into high def you need at least 8 just for the TV service. And if you say
you want to be able to do some VoIP and some data service, you're going to need 9
If you look at the average U.S. household that has, say, three televisions, and
almost all of the installed televisions are not HD right now, although the share is
growing very rapidly, if you take kind of a standard configuration that we think
about, which is one HD television set and a couple standard definitions, plus some
high speed Internet service and phone, in that case you're looking at 3 meg plus 3
meg plus 8 plus a little bit more, so you're probably up in the, say, 25 range to really
be able to deliver all of those services and have some underlying DVR capabilities
and not have contention on the line.
So minimum of 8 would be the base answer to your question.
JOE BINZ: And the last question comes from Dave Sundquist and he asks, "It
seems like Microsoft is trying to create traditional broadcast TV using an IP-based
architecture, but the market has shifted to an on-demand world where 90 percent of
the content people watch is on-demand versus broadcast. Shouldn't all content be
available all the time versus switching through numerical TV channels?"
CHRISTINE HECKART: Yes. So I'd answer your question yes, yes, and yes.
Microsoft is delivering broadcast television, and it's an essential element of the
service, and we want to do it, and we believe we do it better than anybody else. And
we have built DVR capabilities into the architecture from the ground up. We
absolutely believe what you just said, the world is going to move to an all on-
demand. Today, most people watch what somebody else decides to serve up to
them at different points in time, and they orient their lives around somebody else's
TV schedule. And tomorrow that will not be the case, and any DVR user today will
tell you that once you get into a mode of you record everything and you watch what
you want when you want to watch it, your entire world moves to a on-demand world.
And that's built in from our system from the ground up, and it's a key element.
The interesting problem that you have to solve in that all on-demand world is one of
introducing people to what content is out there. And this is a problem that DVR
users talk about today. They record their favorites, but they don't know about
what's new, because they're not being exposed.
So our system has some very interesting ways that you can search and discover new
content, and you can have recommendations delivered to you by friends, by experts
and so forth. And that's something that you'll see roll out over time, some
capabilities are available immediately, others you'll see roll out over time in the form
of new features and new applications, all built on top of this idea that as you do
move to an everything on-demand world there are new problems that you
encounter, and therefore new opportunities to make things available to people.
JOE BINZ: There's a follow-up to that question: "Where will DVR content be
stored? Will it be in the network or will it be on consumers' homes?"
CHRISTINE HECKART: Probably a combination of the two. So the easiest way to
do it right now, and again it varies a little based on the service provider you're
talking about, but you store it on the device. And as you move into whole-home
environments and as you move into network-based PVR environments, then the
answer to that question changes. And even in some markets today there is the
concept of a certain amount of TV, and it changes by market. It can be 24 hours, it
can be seven days of broadcast television that gets stored on the network and
delivered up to anybody. They don't have to store it as a favorite on their own
So you'll see a combination of that. We want to drive that, we are well equipped for
it. In fact, we are better equipped than anybody in the market, because we've built
it in as part of the system from the ground up. So you can be watching any show in
any part of the guide live or flipping through the guide or whatever, and with literally
one click of one button, you can record it. It does not get any more intuitive and any
easier. And again with basically one click you can find it, which is itself kind of
interesting, and with the whole-home feature you'll be able to find it anywhere in the
house from any device.
JOE BINZ: Okay, thanks, Christine, and thanks to everyone for your participation in
today's Live Meeting. We hope that it provided you with a better understanding of
our Microsoft TV business.
And as I mentioned earlier, this Live Meeting will be made available for replay at our
Investor Relations Web site.
With that, I'd like to turn the call back over to Aaron, our Live Meeting producer.