Dan’l Lewin, Corporate Vice President, Strategic and Emerging Business, Microsoft Corporation

Talk, Debate, Collaborate — VCs Get Down to the Business of Startups

Just last week, approximately 200 venture capitalists from around the world converged on our Silicon Valley campus in Mountain View, California to join us for the eighth annual Microsoft Venture Capital Summit. Our theme? “Investing in a Converging World — Everywhere, Locally.” At this one-day summit, we explored the convergence topic with talks by Microsoft executives including Steve Ballmer, Peter Moore, and Debra Chrapaty.

As head of Emerging Business Development, a significant part of my role is to help provide VCs with insights into Microsoft’s strategic and business direction, and in turn, reinforce how we work with startups. VCs are important to Microsoft — as are their portfolio companies. And our annual Summit is a great way to show how, as well as to help them work more successfully with Microsoft.

The What and Why of the Summit

It’s all about networking — and creating an open and engaging dialogue where knowledge sharing isn’t just encouraged, it really takes place. This happens VC-to-VC, VC-to-Microsoft executive or manager, and so on. Lots of energy, lots of conversations taking place, lots of brainstorming. For another take on this energy, read Ed Sim’s blog.

Part of the purpose of the VC Summit is for key Microsoft executives to provide high-level perspective on their product roadmaps and customer needs. We highlight where we are going and have a discussion with the VCs on how we can work together. The Summit is an event by invitation only, and I think of it as a metaphor for the more private conversations that we have throughout the year, that we like to have with VCs and startups where we find opportunities for engagement. We’re aiming to create a win/win/win — for our customers, for the entrepreneurs, for us.

We also use this annual event as an opportunity to better understand some of the important trends that are taking place worldwide — not just here in Silicon Valley and along Sand Hill road – but in Israel, in India, and now in China — nearly 25 percent of the VCs in attendance were from international VC firms, or firms with global presences today.

Why the Data Center, Why the Enterprise, Why Connected Entertainment?

At this year’s summit, we covered a range of topics — from our newly launched robotics platform — to the new breed of enterprise applications (Office Business Applications) that bring the front office and back office together. We also covered the user experience, how to make it richer than ever before utilizing our WPF, WPF/E technology, and how we’re democratizing games development with XNA to the challenge of building and managing mobile services.

The day centered around two “main tent” discussions — one on the data center of the future and the other on our vision of connected entertainment. By having two keynote panels, we presented perspective to the VC community on the kinds of things we’re doing to enable a connected, personal world of digital devices and services – whether you’re a consumer or the operator of a major corporate data center. We’re a broad, horizontal company, and we’re investing heavily in building a platform which encompasses the living room to the back room.

The Data Center Future - More flexible, dynamic and interoperable environment

A recent Wired Magazine article talked about the size and scale of the new data centers, saying that the ‘Internet cloud’ is where massive facilities across the globe will store all the data you’ll ever use. Given our scale, we have some thoughts of our own on what the data center of the future will look like — and how it’s crucial to the future of software plus services. And it all has to do with scale and demand.

Just to give you an example of the scale we operate at: Our datacenters serve 160 internal Microsoft client services, including Hotmail’s 260 million users, MSN Messenger’s 240 million, and Live’s 320 million users. In fact, as we rapidly grow our existing services businesses and prepare for launching our Live services platform, we’re now installing as many servers per month as we had in total just four years ago when Debra Chrapaty joined the company.

Debra Chrapaty, our Corporate Vice President of Global Foundation Services, sees big changes coming for data centers that will require a more flexible, dynamic and interoperable environment. In speaking at the Summit, she said that our customers think their services and information come from a cloud. And that’s exactly the experience we want them to have. But of course, we all know, there’s a lot more to it. And there is nothing fluffy about this cloud.

The “real cloud” is a bunch of concrete, copper, steel and power…lots and lots of power, that delivers the services and information our customers have come to expect. And how do we deliver great services? By providing what customers want, architecting the services so they can run globally at scale, and delivering a great infrastructure optimized for today and flexible for tomorrow.

Just a few of the many data points that Debra cited about our new data center in Quincy Washington:

  • The new data center will be 475,000 sq feet
  • It will have more than 1.5 million pounds of batteries, 300 miles of chilled water pipe, 100 miles of electrical conduit, 600+ miles of electrical wire, 1.2 million pounds of copper
  • It will be a 27 megawatt data center of server load when both phases are complete
  • It will support our delivery of services to users in 234 countries
  • One service of ours that hit 3.5 G bps of traffic on its second day of existence

Another interesting point, Debra talked about how we are as a company driving significant investment into power efficiency and going green. She said that we’re turning up our first carbon neutral data center in a few months. We’ll be able to support 400 customers on the same amount of energy it takes to light a 60 watt light bulb. Pretty amazing stuff!

Ready for SaaS Future, Today

Ultimately, we are building these datacenters to go after the future of software plus services. And we’re already in the market delivering services in a big way with some 165 internal Microsoft clients operating at massive scale.

So we’ve covered the ‘cloud’ data center and the enterprise — where does connected entertainment fit? Connected entertainment provides an integrated view of how all of this works together – for you, with your ‘stuff’. In fact, the disruption taking place in the market presents great opportunities to build interesting companies — all of which assume a presence, your presence on the network, your ability to store things in the cloud, your ability to have your identity at work, syndicate with your identity personally. And because we all have different devices from different manufacturers, we’re driving all of this focused on XML and interoperability.

Connected Entertainment — From Microsoft TV to the eHome Division to Zune

During this session Peter Moore, Corporate Vice President of our Interactive Entertainment Division, talked the audience through our vision of connected entertainment. Moore joined Microsoft in January 2003, bringing with him more than 20 years of experience and leadership in consumer businesses.

Connected entertainment is our approach to moving away from devices that are strictly a hardware play and toward a new industry paradigm where devices are more equal parts hardware, software, and services. How these elements are blended together enables what we call the “four C’s of connected entertainment” — content, connectivity, community and creativity.

Connected entertainment will unite content and community in powerful new ways, enabling consumers to access their music, TV, movie, and games content anywhere, anytime, from any device. And best of all, consumers can share these experiences with the communities of their choice. With many new technologies becoming mainstream – High Definition, broadband, digital media — we must continue to deliver innovative hardware, software and services, and find new and exciting ways to bring technologies and entertainment content together.

Xbox Live - The software plus services model example

Clearly, we have a key competitive advantage in the console space with Xbox Live — we want to extend that success and open up more opportunities for startups than anyone else in the online game and entertainment space. And while Peter says the core gamer got us the 10 million units, we think the casual consumer will get us the next 10 and beyond. Incidentally, since we launched Gears of War in early November 2006, more than 3.6 million copies have been sold. Many say it’s the best looking video game ever, and has already won lots of awards, including the “Game of the Year” at the Computer Game Developer Conference this month.

I am sure that gaming fans among you will be pleased that Halo 3 debuts later in 2007. As the third chapter in the Halo trilogy, this entertainment phenomenon comes on the heels of Halo 2, which was the largest entertainment launch ever on a single day, $125 million gross, greater than any movie. We are also bringing the Live experience from Xbox to the Windows platform for a connected game experience. Lots of exciting stuff is happening as we bring together our four pillars of connected entertainment — music, gaming, video, and communications. This is where the opportunities lie.

Ballmer’s Take — Going Live, Live, Live

After a brief introduction by me, recounting last year’s activities and providing a glimpse into some future areas of interest, Steve Ballmer keynoted the Summit, talking about our strategy, recent noteworthy acquisitions, and then opened the floor to questions.

Steve talked about the essence of Microsoft — we are a software development company that invests broadly in horizontal scenarios: communications, software management, and enterprise connectivity. Yet looking across the entire company, Steve said it should come as no surprise that the single biggest opportunity lies in the shift to online services. And, as a platform company, it should also come as no surprise that Microsoft is building a “cloud platform” that will form the foundation of how we connect with our partners and customers. He referred to building two new “cores” for the company: online information and advertising, and what he called the modern consumer electronics industry (lots of software, some hardware).

And the Live transformation — this transformation to software plus services is fundamental to everything we are doing. It’s not an MSN issue. Windows will go live, enterprise software will go live, connected entertainment — everything will go live. As Steve said, “Live, Live, Live. Everything is going in that direction.” He said that the ultimate test of our success as a company over the next few years will not be throwing software out for the so-called SaaS model, but really integrating the best of today’s software experiences with the best of today’s service experiences.

Good news for our VC and startup partners: we’re fairly acquisitive today. In 2006 we did 21 acquisitions. Just last week, we signed the definitive agreement to purchase Tellme Networks, a leading provider of voice services for everyday life, including nationwide directory assistance, enterprise customer service and voice-enabled mobile search. Microsoft and Tellme share a vision around the potential of speech as a way to enable access to information, locate people and enhance business processes, any time and from any device.

While all our acquisitions may not be the size and scale of Tellme, we’re constantly looking for companies that can complement our long-term strategy. It’s also safe to say that since we’ve launched Vista and Office, we now have a very large developer organization engaged and focused on next-generation products and services. So while we will continue to be an aggressive buyer of companies, we will also be building. I think Steve said it best in his closing remarks: “I’m excited about the growth and innovation opportunities both for Microsoft and more broadly for the industry. We’re counting on our relationships with VCs worldwide to help us deepen our dialogue with the portfolio companies we should consider."

On a closing note, I want to reiterate that software plus services is a fundamental strategy here at Microsoft — we’re engineering quite heavily in this regard and investing relentlessly. And as I said in the beginning, we consider VCs and their portfolio companies as fundamental to our success too. We want the dialogue and the conversations to continue. Relationship building with VCs and entrepreneurs is key to wiring up the global village, and we’re all for that.