Let's change gears a bit. There's been a lot of talk recently about a possible compromise between HD-DVD and Blu-ray, but Microsoft isn't mentioned in these discussions. You guys aren't firmly in one camp or the other, but how important is a single unified standard to Microsoft?
Well there're certainly some great features in terms of the fabrication costs that the Toshiba proposal has and there's some capacity benefits from the Sony camp. And I'm not a hardcore hardware person to know if there is a way to get the best of both worlds, given the politics of who gets the patent royalties and the credit and into the market first and all that. It may take a little bit of time for this to be worked out. We're not at the center of that because we're not a hardware company, and yet we need to make sure that whatever comes out is supportable in Windows. And there're some configurations of those devices a year ago that in terms of the way they were thinking about things technically wouldn't have worked well with the PC environment. We've made significant progress with both camps on that. For example, supporting what we call VC 1 as an encoder that we have as a feature in Windows. Not exclusively, but as one of the required things that happened like six months ago. That was a great milestone for us.
Microsoft is basically agnostic towards either format?
[Long pause] We want to see a single format, and we think it's best for the PC industry for a single format to emerge. That won't necessarily happen and if it doesn't then to some degree we'll have to support both formats.
I really wouldn't want to pick that. I think you basically would have a stalemate because who's going to buy movie
thinking that they're buying a Beta movie? I think it would freeze the marketplace. That's why there's so much pressure
to try and get this resolved. I think basically the winner of [any stalemate] will be called DVD. And HD movies, at
least those delivered on an optical disc, would be set back two or three years.
That actually leads to my next question about home entertainment and the PC. Microsoft has a lot of behind the scenes initiatives right now, but what do you think the relationship is between the Media Center PC and then something like Foundation, Microsoft's software for set-top boxes?
Let me try to be succinct about this. In the home you're going to have a variety of devices. So you'll have a set-top box which you can think of as kind of the simplest device. It will clearly be able to handle digital rights management and deal with high definition digital video. And then you'll have something like a video game that will be a superset of that. And so, for example, Xenon is more powerful than any next-generation set-top box and it can be used as a set-top box, but obviously it can do a lot more than that; you can run the entertainment and other software there.
Then you have a Media Center PC that's even beyond that in terms of storage and the kind of ecosystem that exists in the PC world. And so in the case of the set-top box you typically would store the video back on the server, either the Media Center server in the home, or the your video provider server back at the head-end. And that does have an advantage over sticking a hard disk on everything because you don't even have to think about recording something [ahead of time]. The old shows are just there. There are various rights issues to work out on this, but we've got the user interface and IPTV gives you the ability to watch a show anytime you want without having planned that before the show's aired or having this hard disk in your living room. You shouldn't have to have that.
Anyway so all these things that have to work together in the home, and the cheapest device is that set-top box. We're working with the cable industry and the telco industry on that piece and then we do all this server software for them. You're right that this IPTV thing is very exciting and it doesn't get that much visibility because you know right now the design wins are with cable and telco, and until they roll out big numbers the people won't get that TV is going to change, and that the way you're going to serve, the way you're going to find things, the way you're going to interact with the ads, the way you're going to think about DVRs, that's just going to change. And even the boundary between what's an interactive game and what's TV, that boundary—of course there will still be those two poles—but there'll be things that are even in the middle in terms of learning and game shows. Some of this stuff was talked about 15 years ago when we first got into this and those dreams are becoming a reality.
But how does the Media Center PC, for instance, survive the transition to digital TV? It seems like there's a lot of resistance on the part of the cable companies to provide the kind of support for CableCARD that third-party digital video recorders, be it a Media Center PC or TiVo, really need to be a part of that ecosystem you're talking about.
Oh, we'll get support for CableCARD into Media Center. That's the whole idea of enabling different end devices to connect to the cable network. I mean there are a lot of efforts to enable that to happen. We're working hard with the cable industry right now to get through the specific qualifications there. But that's a very necessary thing and it's nice that the framework guarantees that end devices can get connected up on an objective basis. So we're off doing that. In fact, we have good relationships with the cable industry that are hopefully helping us get that done faster. So we will do that. We have a DTV over-the-air antenna capability in some of the Media Center PCs today, but we really want easy access to all video sources. Today what you have to do is you have to do an analog to digital convert back in, and that's a little bit harder to set up, a little bit more expensive, and you give up a little bit of quality when you do that. You really want to have those digital bits directly, but they reasonably want to make sure that there's some degree of protection there as good as, say, they have on DVD or other things.
Before we have to wrap things up, I wanted to ask you about Tablet PC. According to IDC, only 1.3% of all PCs sold last year were Tablet PCs. Is that good enough? Were those the sorts of numbers that you were expecting when you launched the platform a few years ago?
Well I believe in Tablet and I'm never the best person to know what the ramp up will be like. We're not mainstream yet and we are hardcore, we're going make it better and better and get this thing to be mainstream. I'm very encouraged by this sales growth we're seeing right now. The last three months has been the record by far. You know, it just takes time. You gotta get the cost premium down. We're working hard on this one. We expect it to be a standard feature of every portable and that would be more like 30% of all PCs than 1% of all PCs. So we're going to get there.
How far away are we from that, do you think?
I'm not good at predicting that. I'll be bold enough to say two years away, 2 ½ years away. It's very non-linear. It's not like you go one, two, three, four, five, six, seven, eight. I mean you go you either go one, one, one, one, one, or you go one, ten, 15, 20, where it's just "Oh, you didn't get graphics user interface? What were you thinking? You should have graphics. You didn't get a USB connector? Come on. You know that's a necessary thing." And we need the word to spread. We need people to sit on a plane and see somebody next to them who's using OneNote and they go, "Whoa, what is that?" We need people to annotate things and mail it to people and when they get it they open it and say, "How did that person do that, that is so cool the way they've circled and underlined and done those things." And we just need to get the price points coming down. We need the dual-spindle machines that we didn't have. In retrospect it's clear, in both software and hardware, that there was a lot to be done to get into the mainstream.
But doesn't what you just said point to the fact that a big part of the problem isn't just hardware and software, that it's also with the way the Tablet PC has been marketed?
Yes. But then again, when you finally get that magic thing where you get the right hardware and software and right marketing it's never really the size of the marketing budget, it's more how you get the exposure. Because after all, all marketing does is take enough of a group that loves the thing and gets them talking to their friends. And we have a little bit of that right now. The people who own Tablets, many of them are rabid Tablet evangelists, and so we need about ten times as many of those before we're moving towards the mainstream. There's a lot of neat technology behind this, there's a lot of user benefit, like digital reading, digital annotation, and so I know that the Tablet OS we have today is good, but the next big change will be the Longhorn Tablet. And we haven't shown any of the public that and that's when I said we've only shown a glimpse of Longhorn. We haven't shown Media Center Longhorn, Tablet Longhorn, the browser. A lot of stuff is ahead of us.
Media Center, Tablet PC will all be integrated into Longhorn, correct?
That's right. They will ship. We'll have different SKUs but all those things there will be a major release that will ship with the client and so that's the big update for those things.
So I'll be able to get my Tablet Media Center PC?
Actually we are looking at that, we will have an SKU that combines those. That's been a little bit of a missing piece. People like Toshiba that are doing these machines that are great for that have been very clear about that.
Well, thank you so much, it appears we're out of time.
I had a good time talking with you. You've got a fun job!
Thanks again to Bill and the people at Microsoft for their time; we'll have a podcast of the interview later this week!