who: bryan lee, corporate vp, entertainment and devices division

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09052006 Citigroup Tech Conf Bryan Lee

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 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.

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 consum


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