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SEPTEMBER 2, 2004
Gates: "We're Early on the Video Thing" [Page 2 of 2] Q: So what comes next? A: We're going to ship a new version of the Media Center PC [which connects to a TV and a stereo to play both video and music] this year. It's interesting -- now these convergence devices are in the living room, [which] lets you do entertainment and communications and media stuff -- we're in that alone. It's not like the music space, where Apple and others are in there. That's classic Microsoft. We've always had things where we're out there alone, doing the innovation and defining the category. And we've had things where we're one of the companies in the category pushing it forward. We see these things as connected. But this isn't the point yet where consumers see those things totally connected. Over time, a lot of the advances will come through the simplicity of how those work together. Q: And what's going to get us to the point where consumers see that all interconnected? A: The level of capability, the ease of connecting all these things up, the rights management -- it's really a many-year push to get to that nirvana that you walk into your living room and it's just obvious how you pick up the remote -- and not 5 remotes! -- and do 10 times what you can do with the five remotes that you have there today. People are not happy with their current media situation. Media today is so far short of what it can be. And we're seeing with music, we're seeing with Media Center, a glimpse of what the next two years will bring -- the dream of digital media finally becoming totally mainstream. Q: Do the new digital media products create incremental revenue for Windows and MSN, or are there new businesses for Microsoft to develop? A: Oh, some of both of those things. Making it simple for the buyer who has that Windows PC or these partner devices, that's going to keep the Windows and the Windows ecosystem very strong. We'll also bring in some new revenue sources, some of which will be margin on transactions and some of which will be advertising. As you help people search and find media and deliver those experiences, it creates a context where online advertising becomes a nice part of the financial possibilities. Q: So that's incremental revenue to MSN as opposed to a new business? A: The phrase "new business" is pretty dangerous there. Is MSN Music a new business? No, it's just MSN driving forward on their transaction vision and creating the first few e-commerce applications to get to critical mass in terms of consumers who trust us for that and having great infrastructure for that. In MSN's vision of profitability, music is not a dramatic piece. But in terms of the vision of getting people to do e-commerce with MSN, we decided music was a very important piece. Q: Is there a way to think about how much of a revenue boost Microsoft can get from these products over time? A: No.... We're such a big company in terms of the Windows revenue base and the Office revenue base that it's always going to be hard for us. When things are in their first few years, they're never gigantic. Downloading music tracks will never, both because of size and margin, be a gigantic business. But the strategy of creating the foundation for e-commerce and more content for advertising, that's big. Advertising is already a measurable business even in the Microsoft scale. Will this transaction stuff be a significant part of our business picture over the next five years? We're betting that it will be. But in order to make that true, we have to go way, way beyond just music tracks and have a variety of things that come through that infrastructure. Q: Steve Jobs has said consumers aren't going to watch video on tiny screens. Is he wrong? A: Yes. Ask kids in the back of a car on a two-hour trip, "Hey, would you like to have your videos there?" My kids would. I guess Steve's kids just listen to Bach and Mozart. But mine, they want to watch Finding Nemo. I don't know who made that, but it's really a neat movie. So, yeah, we're early on the video thing. A video device costs somewhat more than just a pure music device -- up in the $500 range. But there's no problem with the screen. The experience for the kids sitting there watching that color LCD screen is fantastic. Getting the content providers to open up their broad libraries and making those things really easy to get at, we've put a lot into that. But [video is] not where the music scenario is. So I'm very proud of what we're doing there, but the explosion of video will be based on the work we do this year.
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