Who: Ray Ozzie, Chief Software Architect When: Wednesday, May 20, 2009 Where: J.P. Morgan Technology, Media and Telecom Conference 2009 - Boston, Massachusetts JOHN DIF UCCI (JP Morgan Analyst): Good morning. Thanks for coming today. My name is John DiFucci. I'm a software at J.P. Morgan. We're really happy to have with us today Ray Ozzie, who's the chief software architect at Microsoft; came to Microsoft almost four years ago with the Groove Networks acquisition. Ray, you may not know that most of my colleagues, J.P. Morgan colleagues, have been followers of you. It just took a long time to follow you. It was a couple of weeks ago we just went off Lotus Notes and onto Outlook. So, we were certainly ready for that. What I'm going to do, I'm going to ask Ray a series of questions, we're going to have a little conversation up here, and then after a little while we'll open it up to the audience for questions, for Q&A. Ray, as chief software architect of the largest software company in the world, obviously Microsoft, you're in a unique position not only to observe but also to drive software technology, but technology in general. I'm just wondering can you share with us how you expect software technology to evolve and technology in general, and t hen also Microsoft's role in that, how you see it? RAY OZZIE: Sure. Well, I've been in the industry, and even going for quite some time, and over the course of all those years technology improves at a relatively steady rate. If you look at the progress of computing, the progress of storage density, the progress of communications technology, you can kind of map out in some kind of a progression where things have been and where things are going to be going in a fairly predictable manner. But in terms of how consumers are impacted by that technology, things kind of bundle up into waves that happen about every five years, that we refer to in some way, shape or form as an era in our industry, whether it was the mainframe era, the mini era, the LAN kind of PC era, the Web era. About maybe four years ago, when I came to Microsoft, I began kind of passionately believing that we are heading into another one of these inflection points around services, and what I really mean by that is in our industry, in the PC side of our industry we have thought about software from a very machine-centric standpoint. We build Office software, our Windows operating system for that PC. Today, I believe that what we really ought to be doing as an industry is stepping back and re-pivoting and saying, what is the solution that we're trying to deliver to customers, and with the Web as the hub, with the Internet as the hub, how is that solution delivered across the different types of devices that we're going to be consuming that value on. So, from a productivity perspective, I'm basically thinking in the realm of connected productivity; that is, what are the activities that you do on a PC very uniquely, what do you do on the Web, what do you do on a mobile device, and how are those bro ught together.
From a connected entertainment perspective how do services bring together the television, again mobile devices, whether they be media players or phones, and again the PC? And in a business context, what are the things that are best achiev ed on a desktop, what's best achieved on the Web, or for roaming and information workers? And from the perspective of developers who develop software for this or IT people who manage it, what are the changing programming models so that people can write so ftware that is delivered to all these devices? So, moving forward, again I believe that the world some number of years from now in terms of how we consume IT is really shifting from a machine -centric viewpoint to what we refer to as three screens and a cloud: the phone, the PC, and the TV ultimately, and how we deliver value to them. JOHN DIF UCCI: As it begins to evolve or as it is evolving, how does Microsoft -- because it can arguably be called the dominant player on the PC today, how does Microsoft d eal with sort of the innovator's dilemma? You have to push into the new realm and adopt the new technology, bring it into reality. At the same time, there's more risk to Microsoft as a business when you do that. RAY OZZIE: Well, in every one of these t echnology shifts you will be disrupted if you don't embrace and understand what's going to be on the other side of that inflection point. Customers don't like disruption. They like to deal with vendors who understand, who can relate to their needs. And most customers ultimately at the end of every shift will end up with some hybrid of what they were doing before, and how they've taken advantage of the benefits of the new technology. So, when I came to the company, in essence I tried to lay out what is the vision of where we're going to go, and then work very, very diligently with the product groups to understand how to bridge from a world of software in this particular case to a world of software and services, not just a world of services because I jus t don't believe that it goes to that extreme. People like to paint, especially in the technology industry like to paint pictures of these extremes: everything is going to be done through a browser, the thin client, and so on. But the reality is people a re very pragmatic when they go to deploy systems and use systems, and vendors who have a hybrid of the old and new approach, as long as you can achieve the economic value of the new approach with that hybrid approach, you're in a very good position. JOHN DIF UCCI: You're in a unique position as you come from a unique background, and I think Bill Gates has called you one of -- or if not, maybe perhaps the, if not one of the best programmers in the universe or developers in the universe. But at the same time, you've also been CEO of companies, you've obviously run businesses. So, as we evolve into this sort of new reality, how do you think business models might evolve to accommodate this? RAY OZZIE: Well, it really depends on which market segment you're t alking about. From the consumer perspective, the Web has brought with it a shift in attitudes in consumer's minds that have embraced free services. So, ad-subsidized services for consumers have
been on the rise. So, whether it's Microsoft or across the industry, we are all shifting in some way, shape or form our offerings to be a hybrid of some entry level ad-supported offering that delivers some level of value, something smaller that people can understand, and then have some upgrade from there, some up-sell, whether it's a transactional up-sell or a subscription up-sell. I don't believe that there are many models out there where you can get all consumers doing some kind of subscription, but I believe a hybrid of an ad supported that leads into some segment of that going to subscriptions and some attach of transactions is really what it's going to take in the consumer realm. On the enterprise side it is really there have always been two sides of the business, the initial transactional part, and then some kind of an annuity related to maintenance and so on, and I believe that that ongoing piece will simply increase because the nature of services is such that there is that recurring more or less subscription form of revenue. And I think for the enterprise largely the model w ill stay the same. The balance of perhaps what is received upfront, this is that ongoing payment, might shift a little bit. I don't believe the business model for enterprises is fundamentally different. JOHN DIF UCCI: And we'd agree that that maintenance part of the software model is a beautiful thing. RAY OZZIE: It sure is. (Laughter.) JOHN DIF UCCI: And then going back, you mentioned every four or five years you sort of see a wave of technology come through, but I also appreciate your comments, because it sounded more like an evolution than a revolution. For us in the invest ment community, we get a lot of things throw n at us. Some of us have been technologists, some of us are, some of us are not, and it's really hard to sort of read through some of the marketing. I'm just curious, today, there is the phrase -- and I think it's unfair sometimes to technologists, because the pundits like to push a phrase like cloud computing to the point where people are expecting miracles. I'm just curious as to your thoughts as to how -- well, two things: What is cloud computing, and is this a revolution or an evolution? And I guess even with these waves of evolutions, there are times when there's dislocations, when at least for a period it's like a revolution, but it's in fact an evolution. RAY OZZIE: The way you phrase it is it's a very good point, because in any of these things there are elements of revolution and everything. In cloud computing in particular for those of you who have gray hair or no hair, you might remember these things called mainframes. And in that era we had a great utility computing model. When I started programming in '68, I used a teletype against this thing, prior time sharing service, and it was a great utility computing model. You'd dial in, you'd get your time slice and you'd pay for it. Over time the pendulum shifted to PCs, a complete empowerment, being able to utilize all of that without having to wait for some centralized organization to satisfy your nee ds. What's happened is that technology has evolved to the point where we all have such -bandw idth is so ubiquitous that we can choose where to put computing. We can put it on premises or put it up in some outsourced datacenter where that would make the most sense.
Right now what's happening is that enterprises are being offered the choice with respect to cloud computing and saying of all the things that I do in the datacenter, of all the invest ments I make, which of those things do I believe have strat egic benefit, which of them have regulatory requirements or compliance requirements that dictate that I really need to have them on-premises; which of the things which I believe -- and any given company might answer this differently -- which I believe is more inf rastructural and I don't get any strategic benefit out of it, and for those pieces of the system let somebody else manage them, because if they're managing them at scale, maybe they can do it more efficiently than I can. If I'm going to spend money on people, I want those people working on systems that will give me business value, not systems that are undifferentiated from those of my competitor. Why do I need to manage my phone system, my e - mail infrastructure, my simple document sharing infrastructure? Perhaps someone can do that more effectively. We are in the early days of this shift to cloud computing. There are a number of vendors who are pitching different -- painting a different picture of the end game, generally because of the nature of their offering. You've got Google, you've got VMware, Amazon, Microsoft, and we each have a slightly different take on it. But the high level pattern, which really I think we would all agree on, is that at some point in time every major enterprise, every company, every ISV is going to have some blend of software that runs on-premises and some that runs in the cloud, and everyone wants tools that they can use to in essence deploy some apps to part of their organization that might be in the cloud, another p art of their organization that might be on-premises, to do that on an application by application or region by region by region or program by program basis. Microsoft is in an extremely good position in this shift. We some number of years ago took some of our best operating systems people and said, if we could envision the operating system as a cloud-based operating system, not just an operating system for a box or a server, but something that's in the cloud, and if we could offer developers the notion of developing a program and just simply deploying it on a box or up into this abstract cloud, what would that operating system be like? And we're very fortunate, because we serve both enterprises and consumers, so we've run very, very high scale services, half a billion, roughly a half a billion users between Hot mail and Messenger, we understand enterprise requirements, and so we set out to build this system, and that's this thing that we've been calling Windows Azure. JOHN DIF UCCI: And as you build that system, what are the things that still need to -what are the complexities that still need to be addressed before it becomes I guess a broader reality? Because I guess you could argue, I would argue that in some ways it's a reality today. RAY OZZIE: Well, as you said, it depends on who you are as to whether you believe that it's useful as is today or how it might pan out. For a given Web developer, you know, if you're in the Bay Area, if you're a small startup, you can use Windows Azure or Amazon's EC2 or Google's app engine, you can write code, upload it today, and get yourself up and running. And there are a number of enterprises who are using it in a trial fashion, but enterprises I believe will not really trust the cloud until they get some experienc e with it, and the best and first where they're going to get that experience is taking something like mail, e -mail, and bringing that up into the cloud, and experiencing it from an IT administrator perspective
to understand can they trust this cloud, what's the bandwidth that I need between my company and the cloud, how do my management tools work that my IT people already understand in managing both the cloud and on-premises. Once they build up their expertise and their comfort level with the vendor and with the architecture, then the opportunity will get greater and greater and greater. And I'm also a believer that the industry needs to mature a little bit. I think that large enterprise customers don't really believe vendors' SLAs. We can talk about our Service Level Agreements, we can talk about the service levels we deliver until we're blue in the face, but a customer knows that until they have choice amongst vendors offering roughly the same thing, they won't really invest equally because they just w ant to make sure that that's the only real SLA that they believe in. And so in the next year or two I believe that the biggest impact of cloud computing is going to be in things like Exchange and SharePoint for us or those comparable offerings from our competitors, and it will work its way into other parts of the enterprise IT environment over time as they get their comfort level. JOHN DIF UCCI: I'm going to ask one more question, and then we're going to open it up to the audience. You mentioned a few companies along the way here, obviously Microsoft, Google, Amazon, IBM, you also mentioned VMware. I'm just curious, you also mentioned that they're addressing this opportunity or this evolution a little bit differently. RAY OZZIE: Yep. JOHN DIF UCCI: I wonder if you could speak to that a little bit. RAY OZZIE: Sure. Let me talk about from Microsoft's perspective, and then you can kind of see in the different dimensions how we might compare these other folks. Microsoft's approach to cloud computing really is there are five areas where we really have significant -- I believe we have signif icant advantage in this transition relative to these other competitors: experience first and foremost, technology, partners, the partner ecosystem, developers, and the actual customers and install base momentum. From an experience perspective the notion that we build both platforms and applications is an extremely strong advantage. By way of analogy, a company in the old days who produced just a graphical user interf ace operating system would be in a different place than someone who writes an application for that thing and the operating system at the same time, because you get experience in-house of what are the requirements that drive the -- what are the application requirements that drive the platform need, how can you improve the platform to serve those apps better. So, that's very important. Serving both consumers and enterprise customers is extremely advantageous. One of our competitors, who might just serve the enterprise or just serve consumers, would understand that aspect of it, but enterprise requirements are markedly different than consumers, and consumer scale is far different than enterprise.
So, those are just two very significant things. So, from that perspective I think we're advantaged. From the perspective of technology, we have invested for quite a while in this area. As I said, we're taking it on as an operating system for the cloud. We're investing with a 20year vision, a 30-year vision. We're investing that this is a very signif icant thing moving forward. As a result, we have a piece of our company called Microsoft Research that has been operating for a number of years in the realm of datacenter research, and we're now on our fourth generation of datacenters. The first generation was really just putting servers in a room. The second generation was really about efficiently installing the racks of computers, maybe a hundred at a time into a datacenter. The third generation, which is really what we've got, what we're doing, kind of deploying in early stage right now, is essentially modularizing at a much larger granularity, and putting thousands of servers into a container, and building a shell or a building with power and cooling, and dropping containers in, so we didn't have to build up a big inventory of servers in advance. The fourth generation is even better, and this is very, very relevant, because in essence we want to be highly efficient. We want to only pre-invest to the point where we really need to pre-invest. And so the fourth generation essentially says you just buy the land and you modularly install the power, the cooling, and the computation as it's needed, so it's very, very advanced that from an efficiency perspective we have tremendous advantages because of those investments that are already self-invest ments. From the partner perspective Microsoft gets I'll say between 90 and 95 percent of our revenue through partners. We're a very, very partner friendly company by our nature. And in order to succeed in this realm ultimately because of local regulations, there will be datacenters everywhere on earth. Every country will have datacenters, and customers who want to serve those end users or businesses in those countries will have to have a footprint there. Microsoft cannot itself build a cloud in every country worldw ide. We have to have partners who help us bring this vision to reality. Yet all of them must be interconnected in some way, shape or form, which is why I call it an operating system for the cloud. So, I believe that the partner channel is highly relevant. Developers: We have millions and millions of developers who understand how to program for the Windows environment. And so if someone programs to the Windows Server, and we make the cloud environment very familiar to them, that's an advantage. And finally, enterprise customers: Again, you can create this new programming model and introduce it to the world, and no one will come if they don't really have a compelling business reason to come, especially in these economic times. So, from the perspective of Microsoft, if we look at all of the enterprises out there that use Active Directory, Exchange, SharePoint, every one of those enterprises is an opportunity where we can save that customer money by offering them something that is much less expensive for them to run, and brings us more revenue because we're solving more of the problem for them, and that's the most compelling thing that we can bring to them in the short term.
So, I think in all of those dimensions, if you just look at each one of the competitors, what Amazon has and doesn't have, what Google has and doesn't have, what VMware has and doesn’t' have, you'll see why I'm excited about Microsof t having a pretty good opportunity in this space. JOHN DIF UCCI: Thank you, Ray. Let's open it up to questions from the audience. I believe there are microphones. So, if you raise your hand, just wait until a microphone comes to you. QUESTION: Good morning, Ray. I was wondering if you could give me a perspective on the relationship between Microsoft and Intel. If you look over the past few years, Intel has been pretty aggressive in either diversifying away from kind of the Wintel alliance and/or making sure that they secure an increasing percentage of kind of system content, intellectual property, et cetera; if you look at what they've done with Linux, and then they announced this Moblin thing for a netbook OS. And I'm just kind of wondering from the outside it seems that Microsoft has been more passive, apart from Windows Mobile, in kind of diversifying from kind of the Intel world, and what can we expect from you guys in terms of more aligning with kind of the ARM camp going forward to really make sure both your place in the wireless side, as well as into the future, and whether it be netbooks or on the Android and things like that. RAY OZZIE: You know, in terms of Microsoft's relation to Intel, I'll just step back and say, any one of these, any large technology company has to look at the future, has to really work with these large technology companies, compare our ow n visions of the future. Each one of us tends to look at the future from a relatively selfish perspective in terms of we see a future panning out from the perspective of Microsoft's offerings and our customers. They do the same. So, at a certain level of the infrastructure, from a processor chip perspective we work with Intel very, very closely, but we also work with AMD. They're both very, very good partners in that realm. They each have their own take internally on how they're investing. One might be focusing more on the datacenter side, one might be focusing more on the mobile extreme, and we need to serve both of those, so w e have very good partnerships with both. There are others who have a view that more incorporates radio technology into those systems on their chips such as Qualcomm, so we'll have a good relationship w ith them. With respect to netbooks and laptops and things in that realm, each one stack ranks and prioritizes their own efforts versus us. I know I'm not giving you a hyper crisp answer to this, but they are an extremely important partner, and we work together to make sure that our software can take advantage of that multi-core, many-core aspects of their product line to make sure that if they have a vision of certain form factors of devices, that Windows is going to be the best operating system from our viewpoint on those devices. QUESTION: Hi, Ray. You said that you've been in the invest ment mode in the online services business for the last four years. I was just wondering whether you could update us on the path to monetization of this invest ment, both from a consumer market perspective and an enterprise market perspective.
RAY OZZIE: The consumer services basically or the biggest advantage that we've been able to have as a company from my perspective on the consumer services is how it has driven, how it is driving the services transformation throughout the rest of our business. So, if you look at the profitability, the sheer profitability of the Windows Live invest ments and MSN and things like that, it's the benefit to Microsoft is far greater than what you would see in purely those numbers, because the storage systems underlying search, for example, this thing that's internally named Cosmos, very, very high scale file system, that is the basis for Windows Azure, Azure's file store, and that's going to essentially benefit every property, all internal properties, and developer properties that sit on top of that thing. The management systems for search are essentially the Windows Azure ones are derived from the learnings of what we had to do to manage tens or hundreds of thousands of computers in datac enters with search, and so on. So, whereas the business models of Exchange Online, SharePoint Online will be very aligned for customers w ith those products, and we'll make sure that we have that the customer understands how to license those products where software and services are thought of holistically in that realm, those consumer services investments are really benefitting the services transformation in those other products. Could that be it? There we go. QUESTION: Hi. Can you talk about what you learned from the Vista product rollout from both a product perspective and a marketing perspective? RAY OZZIE: How much time do you have? (Laughter.) I think the biggest learnings, there are some internal project management learnings that are probably not of broad relevance. The fact that the product took the time that it did was in some ways related to some false starts because of I'll just say over-commit ment on -- we had a vision that was larger than what we could achieve within the period of time that we needed to bring it to market, and we could do better on that, and Windows 7, the discipline in terms of project management and processes in essence is built on a lot of those learnings from that experience. Another of the most signif icant learnings is that when your partners -- I talked about our partner ecosystem -- we fail without our partners, without partners in many, many areas. And if we don't give very clear, predictable signals to those partners about dates that we're going to meet, about milestones that we're going to meet, they don't know when to invest and when not to invest. And unless we're all aligned, we can't come to market in a way that has a great experience for every customer. So, if drivers are not ready when we bring it to market, it will be a poor experience for the OEMs who are trying to put things together, it will be a poor experience for the individual end users. So, I think in retrospect just preparing the ecosystem and having a very predictable roadmap for our releases, we didn't give it as much thought as we should at the time given our scale, and we've given it tremendous, tremendous thought in heading into this Windows 7 launch. JOHN DIF UCCI: Do we have any other questions? We have one minute left, Ray, so I'm going to squeeze one in here. Because you mentioned the word efficiency quite a bit, and actually one of the questions here, Microsoft in the last quarter has talked about and they
obviously did and they're starting to put things in place from the organization more efficiently, especially given the economic backdrop here. I'm just curious from your vantage point how is this happening in Microsoft. RAY OZZIE: You know, one of the great things about the Microsoft culture is that it's a very self-critical culture. You go in and people will -- we have many, many, man things to talk about related to our successes, but people tend to reflect on how they can improve. One of the things that is true if you worked at Microsoft, and it's very stunning for people who c ome from the outside and come into Microsoft, is that when a company is very, very, very successful, a lot of the challenges that you're faced with are a direct result of that success. And in Microsoft's case we have had the ability to say yes and add more over the years in terms of solving more problems for customers, creating more offerings, and it's really great from an opportunity perspective, because you address more and more of the market. But as a side effect of that you create internal complexity that you really don't understand until there's a forcing function that makes you understand it. The economic situation that we're in right now in many ways is a real blessing in disguise for Microsoft because by just simply forcing yourself to look internally and ask questions about what are the processes that we can do, that we can revisit, that we'll simplify, that we'll simplify the decisions that need to be made, it's a very, very healthy thing from an internal culture perspective and in bringing things to market. Once you simplify those things, it ends up helping customers because some of the seams that created internally show up in the products that individual end users experience, that IT people have to manage. And so net-net I actually believe that Microsoft is going to come out a much stronger company on the other side, simply because of this as a forcing function to drive those efficiencies throughout the system. JOHN DIF UCCI: Thank you, Ray. Thanks for being here. RAY OZZIE: My pleasure. Thanks. (Applause.) END