Gates taking a seat in your den

Microsoft's chairman chats with CNET News.com just before CES about his company's consumer push--and why he hasn't done a blog yet.

Michael Kanellos Staff Writer, CNET News.com
Michael Kanellos is editor at large at CNET News.com, where he covers hardware, research and development, start-ups and the tech industry overseas.
Michael Kanellos
16 min read
LAS VEGAS--Bill Gates is coming to your living room, whether you like it or not.

Microsoft's chairman is setting the company on a course to provide software and tools that will allow different forms of entertainment to blend. Messaging will become a crucial part of Xenon, the code name for the next Xbox. Microsoft will also work with television outlets like the Discovery Channel and MTV Networks to create tools for delivering content, as well as advertising, into the home.

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Bill Gates, chairman, Microsoft

Its eyes ever set on the competition, Microsoft will continue to raise the stakes against Apple Computer in the music industry and against Google and Yahoo in search.

Meanwhile, Microsoft Research is working on ways to reduce the cost of getting people in emerging nations hooked on the Internet. One idea: Mesh networks that will let several families share connections.

Gates spoke with CNET News.com on the eve of his keynote speech at the Consumer Electronics Show in Las Vegas about Microsoft's consumer plans, the convergence of entertainment technologies--and why he hasn't done a blog yet.

Q: The industry's been talking about convergence for years. The first products have come out, so what's next? Interoperability--is that the next challenge?
A: Well, there's a lot of that going on. For us, the key convergence product is the Media Center PC, which is the idea of that single remote control giving you the best TV experience, music and photos but also the full power of the PC, and we've got lots of partners who keep signing on to Media Center and doing neat things. We'll show some Discovery Channel stuff in the keynote. We have a new relationship with MTV where they're using our rights management and formats, and we're connecting it to the Media Center.

Apple is a company that's had three hits, and that's very impressive. There are a lot of companies that don't have three hits.

And so there is growing momentum with partners, growing momentum with the hardware. The price of Media Center PCs came down a lot, which is partly why we were able to double our sales this holiday. We've got some new remote controls from Philips and others.

And so you fill out the ecosystem, you get the people who install these systems to understand how they do the customization, you get the word of mouth going, and so I'd say we feel great about where sort of the centerpiece convergence device is and the peripheral things happening around it.

How are the different entertainment and media industries going to be affected by these changes. For instance, it seems like advertisers are really impacted.
Well, there's a thing that we can do for the advertisers that is critical for them, which is to allow the advertising to be targeted. That's what you've seen with our IPTV (Internet Protocol television) effort--companies like SBC Communications signing up for that--and we've got BellSouth as a new partner there. With that infrastructure, even for people watching the same show, you can insert just in a perfect way an ad targeted to that individual.

And the value of targeted advertising is really twofold. First, it means that the person is less likely to want to skip the ad, and second of all, it means the chance that they'll actually do something--buy something.

And so the new TV infrastructure will be about very targeted advertising. Advertising is taking on new forms. Obviously, in the search space, we're doing neat things with advertisers. No doubt, it's not going to stay the same as it is today.

What changes does this mean for Microsoft? Do you see yourself becoming, let's say, more of a seller of content?
Well, the most explosive piece of content this holiday season was "Halo 2." We sold 6.3 million copies, we've had 69 million hours of online game play. And so is Microsoft a content company? Well, I'd say "Master and Commander" is good--people have talked about how the story made them cry--that's content, but it's also software.

The boundary there has always been a bit gray. Our main role is to provide the platforms and the tools, and simply partner with the content companies like MTV and let them do what they're good at. It's mainly in this interactive realm that we need to come in and do some complete content ourselves.

One of the big phenomena of the year has been blogging. Has the growth surprised you?
Well, actually I think the biggest blogging statistic I know, which really blew me away, is that we've got close to a million people setting up blogs (Web logs) with the Spaces capability that's connected up to Messenger.

We didn't do Xbox just to do a video game, we did it to be part of our vision of the digital lifestyle, and with the next generation, we really get to go there.

Now, with blogs, you always have to be careful. The decay rate of "I started and I stopped" or "I started and nobody visited" is fairly high, but as RSS (Really Simple Syndication) has gotten more sophisticated and value-added search capabilities have come along, this thing is really maturing.

And we've done some things in Japan and Korea that are unique blog experiments. The Spaces thing is a worldwide effort. It's a great phenomena, and it's sort of built on e-mail, and so we need to integrate more blogging capability into the e-mail world--and as we do the next generation of Outlook, you'll see that. We need to integrate it more into our SharePoint, which is our collaboration Office platform, and then, as I discussed, MSN is embracing it so that instead of thinking about, "OK, I go to one community to do photos, one community to do social networking, one community to do this," we say, "Hey," off of Messenger, which has got your buddy list already, then, "Let's let you do the photos and the social networking and everything--but starting in an integrated way off of Messenger."

Which ones do you read, if any?
Well, it's interesting, I get a lot of people--and this is very typical for me--I get people who are forwarding things on to me, so I sort of have

human search engines that will say, "Hey, there's a particular thing that's hot and that's interesting."

I just type in various keywords. We have a lot of blogs that are just internal to Microsoft where people are completely open about what's going on with this, what's going on with that.

I've toyed with doing one myself, but I don't want to be one of those people who start and then don't finish it, and again I'm thinking maybe I could do one a month or one every six weeks--something like that. I'd kind of like to, but I've got to be sure I can keep going for at least a year to make it worth doing.

Will there be much of a push at Microsoft to sell third-party content like music, or is it always going to be a smaller part of you?
We've said that having the music platform there is just part of the overall online relationship that we want to have with these customers.

The boundary between what's game playing, what's socialization and what's communication--you will have really broken down the barriers there.
In and of itself, it's not going to be a big source of a profit because there will be lots of people with stores out there, but then in terms of making it simple, having it work on all the devices, work with all the stores--that is important to us. The Windows ecosystem provides variety.

Apple is doing things the way Apple does--where it's the Apple hardware and the Apple store, that's great for them. We're doing it the Windows way, where you've got things like this Creative Zen Micro, which sold out this holiday season. This brings the photo capability in, and it's a very attractively priced device. So the variety story is an important one for us; it uses our rights management format and supports a subscription approach that we think can be a significant part of online music sales.

What do you think of Apple's success so far? I mean, they clearly have had a hit with the iPod.
Absolutely. They had a hit with the Apple II, they had a hit with the Macintosh, and they have a hit with the iPod, so this is a company that's had three hits, and that's very impressive. There are a lot of companies that don't have three hits. And in the same way that Macintosh helped get people exposed to the graphical user interface, the iPod is doing a great job getting people to think about digital music.

In the long run, there will be a lot of people making digital music players, and we think that there will be a very different market share with dozens and dozens of companies. And other than Apple, all those player makers are signing up to work inside the Windows PlaysForSure ecosystem.

There's a big debate over whether games will surpass movies and TV as a bigger portion of revenue in the entertainment industry. What do you think will happen?
Well, there are a couple things to look at. Instant messaging will go from just being a text thing to also being voice and video and music, so instant messaging, particularly for young people but in general, is very, very explosive.

And Xbox Live is really talking to your friends, doing things with your friends. And as we bring in new game titles that are more approachable, appeal to different demographics, the boundary between what's game playing, what's socialization and what's communication--you will have really broken down the barriers there.

We can make these hot, super great graphics games something that are easy for people to use. That's a big initiative we have as we move to the next generation of Xbox. Likewise, the connection between the Xbox Live and our Messenger will be really simple so people can say, "Hey, come and play," "Oh, okay, I'm finishing my homework, I'm almost done, I'll get on and play with you." And so even as they're connected up to each other, they don't think of, "Oh no, now I'm gaming, now I'm communicating."

What are some of the primary goals with Xbox 2?
Broadening the market, having media capabilities that when there's a PC, we connect up to that. This whole story of the Windows Media Connect and how all the formats and rights management and that simple Media Center menu that's just got TV, photos, music right there--those are common elements we're bringing to all the home devices.

It's not people have stopped using IE, it's just we've got lots of good ideas that can match and move ahead.

We didn't do Xbox just to do a video game; we did it to be part of our vision of the digital lifestyle, and with the next generation, we really get to go there. In the first generation, we had one simple goal, which was to establish credibility as a great video game platform. We've done that. Actually, the last few months in the United States, we outsold Sony with the PlayStation. So even though they have the biggest installed base, we are a very strong, credible No. 2 in that. As we go into this next generation, it's much broader.

Yes, great video gaming but videogaming for a broader set of people, more communications, more media, more connectivity. And at the same time, we move up to things like high-definition graphics and wireless that the chip breakthroughs allow us to get to.

So just for the games alone you'd go, wow, but the concept now of bringing in your music, your media, connecting to the PC, connecting Xbox Live to Messenger--that just makes it a very big deal.

It's a full entertainment center, basically.
That's right. So Media Center PC and Xbox become totally complementary. You've seen a bit of that, where we let you take music from PCs and put it into game titles, and we have this extender concept where the Media Center can project through the Xbox, but that's just the start of what we can do there.

One thing that's kind of intriguing in Xbox 2 is you're participating a little more on the design of the silicon.
Well, we have some key partners that we've announced. ATI and IBM are the key chip partners, and there are some others. But I'd say our sophistication is much higher in this second generation. So every level, what we're doing in tools, what we're doing in Live, the way we're working with the publishers, the way that we've gotten involved in the

hardware design--we're being very coy about when and all that, but I'm certainly excited when it comes time to show at how much smarter we are getting to do it a second time with the team that's been built there.

Any interest in handhelds?
We are not in the handheld space. We watch the intense competition of Sony, Nintendo, Nokia--whoever comes along with interest. Our portable gaming will be focused on things like getting onto the phones, getting onto portable PCs, but our Xbox team is focused on the TV-connected console. And the fact that Sony's a little distracted with that may let us do all the better in the next generation.

Other browsers are making market share gains. When does this become a problem or an issue for you guys?
Well, people get confused about browsers. You can have as many browsers as you want on your PC, just like you can have tons of music players and things like that.

As RSS has gotten more sophisticated and value-added search capabilities have come along, this thing is really maturing.

So when people say Firefox is being downloaded onto people's systems, that's true, but IE is also on those systems. Firefox is new, and people are trying it out. There's a certain percentage of people who do that--it's very easy to download.

We need to keep IE the best. We need to innovate in IE, do more add-ons, do improvements. We have some very exciting plans there. Some percentage of users are going to try Firefox and IE side by side, and use the one that's best.

So no big problem; it's not that people have stopped using IE, it's just we've got lots of good ideas that can match and move ahead.

In terms of our agility to do things on the browser, people who underestimated us there in the past lived to regret that.

But some people have left because of security issues.
Well, no one invests more in security of their browser than what we do on IE. The key message we have for people is they should turn on auto update because if you turn on auto update, without you having to think about it and go through a bunch of user interface or know about this or that or the other thing, you can know that there are hundreds of very smart people who are constantly improving your browser and making sure that you're safe. And so with auto update and IE, you're getting the top security team and the quickest response team that there is anywhere.

Now onto the Google question. Why do you want to compete, or does Microsoft want to compete against them? Does Microsoft want to build up MSN to be a general search engine?
Absolutely. We've been in the search business even before Google was around. The commitment we made is to build unique search technology across the board. And if you look at the Microsoft Research things that we've had breakthroughs in--natural language, document analysis, personalization, image analysis, language translation--our research agenda will allow us to take today's search from ourselves and Google, and make what we have today look like a joke. And a lot of that will be built into applications like Office or the Windows shell. I see our desktop search offering--I think every review I've seen has rated it far better than what Google is coming out with.

I've toyed with doing a blog myself, but I don't want to be one of those people who start and then don't finish it, and again I'm thinking maybe I could do one a month or one every six weeks--something like that.

When you get to Longhorn, it will even have deeper integration, and we'll have the same index format. So anybody who wants a smooth transition to Longhorn where you don't have dual indexers and everything--the commitment we're making at our desktop search is that same indexing, same format, and we'll make that very smooth for people.

So we want to compete on the desktop because that's a key innovation area for Windows. We want to compete in the cloud because we think the competition between ourselves and Google and Yahoo will improve things.

If we thought somebody was doing the best possible job that could ever be done in search and there wasn't some big revenue out there, maybe we wouldn't do it, but quite to the contrary. Whether it's understanding maps or virtual worlds or document analysis, today's search is nothing, and we've got the software technology that will drive it to those new levels, as well as being a very significant business.

It sounds like the next step in search might be audio and video.
Oh, sure, everybody is working on those things, but just take the idea of finding your local pizza place and doing that right; search doesn't do that well today. Search is really crummy today--it's just that it used to be really crummy, and now it's better, and there never was anything like this before. So most of the results people get back today are irrelevant results. Deep analysis can take us much further, and that's why we're investing a lot, and you'll see us more very rapidly.

This year, there is a big push to make cheap computers for emerging markets. How is that going to have to evolve? A $300 computer is still going to be too expensive for many, probably, in Russia, India and other places.
Well, that's not really true. The expensive thing is the connectivity. Getting Internet connectivity is expensive. If all they had to do was pay for the computer--$300--and the communications were free, then we'd see that PC usage would be very, very big. Ironically, communications costs tend to be highest in developing countries.

So you need to do shared PCs through cafes or community centers. We're doing a lot of so-called mesh networking research that could use wireless spectrum to try to bring those connectivity costs way,
way down, and that's where you really see widespread computing breakthroughs.

The hardest thing, by far, is communications, then the hardware costs. We can make sure the software cost is never really holding things back--that it's a small-enough percentage. In educational things, we do a lot of software giveaways. We've been very generous to make sure that when people first come into computing, software doesn't hold them back.

If we thought somebody was doing the best possible job that could ever be done in search and there wasn't some big revenue out there, maybe we wouldn't do it, but quite to the contrary.

That's interesting--the mesh--because that way, people can actually share a connection.
Yeah, the hard thing is the back haul of the Internet out of the village. Within the village, sure, you can mesh that up, but if people are going to be streaming video, you need quite a bit of capacity there. So it's not a simple problem to solve; we've got actually multiple research locations at Microsoft working together on this mesh thing, and we've had a lot of conferences working with third parties, so we're optimistic that that's the thing that can solve the thing that holds back developing-world computing.

In recent years, there's been a lot of people clamoring to reform and restrict intellectual-property rights. It started out with just a few people, but now there are a bunch of advocates saying, "We've got to look at patents, we've got to look at copyrights." What's driving this, and do you think intellectual-property laws need to be reformed?
No, I'd say that of the world's economies, there's more that believe in intellectual property today than ever. There are fewer communists in the world today than there were. There are some new modern-day sort of communists who want to get rid of the incentive for musicians and moviemakers and software makers under various guises. They don't think that those incentives should exist.

And this debate will always be there. I'd be the first to say that the patent system can always be tuned--including the U.S. patent system. There are some goals to cap some reform elements. But the idea that the United States has led in creating companies, creating jobs, because we've had the best intellectual-property system--there's no doubt about that in my mind, and when people say they want to be the most competitive economy, they've got to have the incentive system. Intellectual property is the incentive system for the products of the future.

I'm wondering, too, as you look forward 10, 20 years from now--what are the big problems that technology industry really needs to focus on?
Well, the technology business provides tools of empowerment, tools to let people be creative, to communicate, and there's no end in sight and certainly a decade's worth of work to make the ease of use and the power of these tools better. If you just think about meetings and the ability to record the video and the audio of the meeting--create a transcript, notify people, have them see the parts they care about--it's crummy today, and that's solvable.

When people want to manage a project with many companies involved--keeping data confidential, tracking and knowing what's going on--that's very crummy today compared to what it can be.

We, with our Office franchise, are committed to making workers far, far more productive than they are today. And believe me, we're not running out of ideas. The phone is inefficient today with phone tag and busy signals. E-mail is inefficient today with seeing stuff that's less relevant and how you organize it--bringing in the blog-type capabilities is very important there.

There's plenty of room to do dramatic horizontal innovation that will drive productivity in every sector of the economy. Whether it's scientific discovery, health care, engineering, marketing, sales--you name it--the tools around Windows and Office are not even half of what they will be.

If you take that and map that into the home, that's where you get the idea of movies, music, games. There, again, we're not even halfway to what we can deliver in that digital lifestyle.