So yes my good pal Chris Grant (of Joystiq) and I got a chance to briefly sit down with Robert Scoble, Brian Lam, and Brian Crescente to chat with Bill Gates before his annual CES keynote. We couldn't include everyone's questions here (for the full video go check out ScobleShow), but we've got a full transcript of our questions spanning such topics as the advantages of vertical integration in the Zune and Xbox 360, DRM, net neutrality, and Microsoft's direction after Bill's eventual departure. You know, the light stuff.

This may be the last time Engadget gets to speak with you. I don't know exactly what ...


No, no, it won't be. I promise.

So you'll be around in 2008? You'll deliver the keynote?

I'm full time until mid-2008. And we're mixing it up a little bit. Robbie's doing a big part of the keynote tonight. We'll have even more than one chance to talk between now and when I'm not full-time.

Ultimately when you do depart, what do you want your legacy as a technologist with Microsoft to be?

Microsoft's always been about software that empowers people. What could happen over the next ten years is probably even bigger than what's happened throughout the entire history as we get speech and vision. And we're just getting rid of constraints. Storage constraints. Resolution constraints. At the end of my keynote ... everything that I talk about product-wise is all here and now, this year kind of stuff. Almost everything's shipping except the Home Server, the photo stitching thing, but everything is here. I take this thing where I show and say if you have projection throughout the home and it can project onto the walls and surfaces -- what kind of things can you do? There's no specific thing, but I've done some neat things like student tablet that in terms of the few projects that Ray and Steve have picked for me to still be involved in, like the tablets since I've been very involved in that. The switch is I go from being the person who's looking at the overall thing and how the pieces stick together -- making sure they're not missing pieces or duplicating pieces -- and Ozzie picks up that. I go to where I'll have a few project very focused and he's got the total driving overview of how it all comes together.

[continued]

There's nothing magic about mid-2008. It's a year where research is strong, Ray's stepped up to his role, Craig's stepped up to his role. It's a big year for the foundation in terms of how it's scaling up and some of the breakthroughs we wants to make. You could think we're more like a startup, a pretty good sized startup, in terms of what the path is for that foundation. There's a lot more shaping that and this industry -- the most innovative and fast-moving industry -- sort of understands the shape of it better than that philanthropic goal. So I hope Microsoft does well. I hope software keeps empowering people. I don't have much doubt about those things. I know I'll miss some of the things I get to do. I mean, today's a fun day where I get to talk about the whole strategy, saying to people, "Hey you heard me say something last year and here's what we really did and here's what went slower or better or worse than we expected."


What new direction do you think Ray Ozzie is going to take Microsoft that hasn't really been explored yet?

You can go back to Vannevar Bush's writing about the Memex machine. Nothing's been invented since then, you could say, depending on your perspective. Ray gets to pick which things are ripe to go after, just like I've gotten to. Getting the company into tablet earlier, internet TV earlier -- let's get into video games, that's key to the living room. How do we get in, how much risk and investment are we willing to take? Making sure Microsoft research in terms of its homework its relation to the universe stays up in the front. So he'll be making lots of choices about things but it's not like some totally new direction. Microsoft was a software company in 1975, they'll be a software company twenty years from now. That's what we're good at, that's our unique contribution. Live is the thing that he, as I'm still in the software role, he's got this huge chunk that relates to Live that he is driving the company to. That's a very big deal. If you go inside Microsoft right now and said, what's the thing when Ballmer shows up, Bill shows up, Ray shows up, they just try to hammer in your head? It's Live, Live, Live. We've got to get Windows more Live-enabled, Office more Live-enabled, we've got to get some of the online properties more integrated, we've got to connect the phone, the Xbox, the PC. So Live is sort of his big focus for the next several years making sure we stun people with the Live platform.

You talked about software empowering people, Microsoft has this big push -- starting with the Xbox and now the Zune -- from doing not only software to empower the user, but to helping hardware manufacturers, and then to actually making the hardware yourselves.

Most hardware we don't make ourselves. The PC is a great example. One of the big news things you'll see at this show, is the degree to which during the development of Vista we were able to sit down with the hardware companies, hear what they were going to do make sure Vista enabled that, and made sure they focused their new hardware advances on things Vista supported, so you'll see the SideShow-type laptops, the touchscreen stuff from HP, this Toshiba has this wireless docking, which means it's not docking. It uses ultrawideband to take the video signal out of it as a DVI digital signal and send it up to the screen. Anyways, a ton of things where hardware meets software, because of the partnership there. You know, with the Tablet PC we actually did a prototype of that, and we keep doing prototypes. We've always done that and we're doing more and more of that prototyping type stuff, like our relationship with HTC and others on phones. We've gotten a lot better at getting the hardware and the software to come together.

If you look at something like the 360 which many consider to be a huge success, and now you have the Zune following in its footsteps, you have Robbie Bach up on stage with you tonight, and that's all based on that idea of using your software prowess but building the hardware yourself.

We're only semi-religious about not building the hardware. [Laughs.]

[Regarding the 5m Live subscribers announcement] So how many are paying?

That's Gold and Silver. I know the majority are paying, I don't know the exact percentage. Of course, there are two ways to pay. You can be Silver and buy points and buy things à la carte or you can be Gold which you pay the subscription and you buy some things à la carte. The majority are Gold. There's a big lag, there's a ton of people that bought Xboxes in the last few months who just don't show up because they just haven't connected it up yet. So our numbers these next two months will see a big increase there.


Back to what we were talking about with the 360 and that kind of success, and how the design process that's gone into the Zune and the 360 has been a little different in its vertical integration than what Microsoft normally does. Do you ever see Robbie Bach and the E&D division splitting off into a different company or Microsoft splitting up into sub-companies?

I know there's no discussion of anything like that. You get out past five years, who knows. Everything we do is about software. What you're going to see -- if you haven't already -- is Xbox Live connecting up to the PC so your presence -- the ability to send messages and talk, you can even play some of the games that are cross-platform enabled -- that Live asset is going to make gaming on Windows a lot better. Just give people a new kind of experience. Given what we think about being connected where you get your schedule on your phone, you get it on your TV, you get it in your car, it's cross-device. The idea that you'd ever split and say that these devices are here and these devices are here, that goes against the whole direction, which is user-centric.

Living room being the goal for the Xbox project, you're there now. You have all these Xboxes out there, they're connected to the internet, you're rolling out IPTV. Is gaming an ends to a means, or is gaming still the primary goal?

The reason we got into Xbox at the beginning was not just gaming. It was very, very important --

It's a gaming machine, no less.

Yeah, but it's a general purpose computer. In terms of that first generation in particular where we were still known as a PC company, the need to make clear how we were prioritizing the needs of demanding gamers, that was super important. That was super important in terms of the culture of the team that was doing the work and how they thought about their marketing. But, we wouldn't have done it if it was just a gaming device. We wouldn't have gotten into the category at all. It was about strategically being in the living room. And this is not some big secret. Sony says the same things. During that first generation, they had more latitude to talk about it since Sony has already gotten their gaming credentials but they were not there even more than gaming. For us, people sort of take it for granted -- hey, you do phones, and set-tops, and IPTV and all these things so it's easier for us now that that's part of the message for people to say, of course Microsoft's is going to make Messenger work on the Xbox. They're going to let you look on your phone and see that someone beat your record on this game and schedule an Xbox gaming thing. There's a huge milestone this year -- I'm basically agreeing with what you're saying -- Xbox was a gaming device. Now you can download videos on it. I sit and watch high-def videos never touching a plastic disc. You can take all the PCs in the home and use this extender capability so you get your PC richness up on that screen, in Media Center or whatever, and we're announcing that it's a set-top box so if you're somewhere that's got IPTV now you've got live TV, the most state of the art experience; downloading movies, state of the art; gaming, state of the art; and projection of the full PC experience. It's not a PC but it brings that PC into the living room. So when you talk about convergence it's the first device that says, oh yeah, this is convergence. It's real.

Those little plastic discs that you mentioned. You told Engadget last year that downloadable was the future. Now you have Xbox Live Marketplace which, by all accounts, is doing very well -- it's beating Amazon's service for downloadable movies -- and you're adding IPTV. But there's this format war that's still going on. Is the push for downloadable content for Microsoft going to expand? There's still no announcement whether you'll be able to download movies on your computer and watch them on the 360 -- is it still going to be 360 focused or is the idea to really leverage the power of the company as a whole to push downloadable content?

We're going to push downloadable content as much as we can. You've got the challenge there with rights management of making it so that creators get paid and it's simple to use. There's some progress there but that's a challenge to the industry to meet those --

-- so it's a technological limitation at this point?

No, the content people have to take the leap of faith. With Xbox, where we've got pretty rich protection capability, we'll probably get slightly more video on Xbox than on today's PC hardware. We're going to have the same video service on both, but the catalog might be larger where you've got a stronger hardware protection. We think HD-DVD is great. It's a fantastic experience. I bought a lot of the discs, played with them. It's neat. But over time, eventually online is going to be more important. But we're super pleased with our Toshiba partnership. We had a great year in terms of the devices, the attach rate, the movies, the quality. Also, there's this whole format thing about VC1 and how VC1 has emerged -- that's pretty hardcore -- but our codec's emerged as the highest quality even versus the MPEG-4 stuff which if you'd asked people a year ago they would have said there's no chance of that happening and that's happened in a very big way. Yes, we're going to get way more content into that Xbox. Robbie's got an announcement about some new partnerships there, got some new content in Media Center. It's both breadth of content and interactive content. You're actually seeing some of the interactive more in Media Center. You should look at this Fox Sports experience where you can, as you're watching the game, get more information. It's high def, interactivity, breadth, and simplifying rights management. Those are all the things that you need to do. Plus the normal march of broadband pervasiveness.

Part of the technology driving vertical integration was what allows better rights management, allows you to get content deals for the Zune and for the Xbox that might not otherwise be obtained on the PC. So, I would assume at a certain point in the future that the living room is going to be the more important platform than the PC. Do you ever see that happening?

No. The boundaries between devices shift over time and even these definitions will get kind of tricky. The Media Center is way richer. That's the richest device. That is the superset device. Remember: PCs, you carry them around with you, you use them at work, it's a gigantic market. I can stick up for both the PC model, where you don't pay any royalties, you can introduce games without asking anybody -- that's a great thing, and you'll see a lot of PC gaming innovation, some of which we're very directly involved with, some of which just happens because DX10 is there, these graphics chips have gotten pretty incredible. NVIDIA and ATI's roadmaps are kind of mind-blowing in terms of the number of parallel units that will be there for us to execute on. And PC gaming is where you'll see that really cutting-edge high-end stuff happening. As the Xbox gets cheaper and cheaper, some very cool things are happening there. Both of these models, even in the living room, are still very important. The kind of openness and variety of the PC and the kind of very inexpensive deep integration that Xbox represents really bootstrapping off of video gaming but being far more than that.

My final question is one that's on a lot of peoples' minds right now. As Microsoft definitely gets into IP, high-def movie downloads, content on your PC and your Xbox and all these different Microsoft hardware platforms, how are rulings on net neutrality and net neutrality law going to affect Microsoft's business?

Microsoft wants people to build internet infrastructure that has the ability to feed high definition video to every screen in your house, so we want the incentive to be there for people to build up new networks and we want that network to be something that content from everyone is sort of treated in a reasonably equal way. So we had the content people saying things that would have eliminated the incentives to build better networks, and we have the people who want the network incentives saying, hey, just trust us, we won't do those things. Those were the two sides. Craig Mundie was kind of a fair broker because we need both. We need the content people to see this as an open platform so they'll keep innovating, including ourselves, and we need these new networks built. There's regulatory models in Europe where the high-capacity networks just won't be built because they've set sort of equalization in terms of the sublease rate, the wholesale pricing rate that means you're just not gonna do a high-definition interactive network. And you're not going to get the enablement that comes with that. It's this complicated stuff. Craig, and the people that work with Craig spend time in DC. We thought there was a way that gave people the best of both worlds. Apparently, AT&T committed to some flavor of this as part of their FCC thing. Every country is different on this, and this is a very complex thing. In its purest form you eliminate the incentive to build better networks so you have to be careful about that.


It's really unfortunate that some of these networks in Europe are not being built because of these regulations and I think a lot of people want to know that Microsoft is on the same side as the consumer and they want to enable networks to be built that are not regulated by net neutrality laws.

Right! But you're either a network company who don't want any restrictions, or a content company who doesn't understand the disincentive to building out the networks. There were tons of things proposed that would have made the US just like Europe. These are complex issues. What the consumer wants, in terms of, hey, my network gives me access to everything but it's also very high-speed -- that's the ideal for us. And as a big company in the industry, it's incumbent -- it's a part of our responsibility is to learn these complex issues and not let either the extreme things block what really should happen. The US did have a problem in the 1996 act that it had as an assumption that sub-leasing could do this magic thing, and how did that go? Why is Korea ahead of us? It's a complex thing. I think we're doing the right things. Go and look at the AT&T filing; I haven't looked at it specifically, and see if you think that strikes a good balance.

Thanks so much!

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