Wireless: The Realities of Where It Is, Where It Is Going, And What Racing Can Expect
Thursday, March 10, 2005
11:00 a.m. - 12:00 p.m.

Mr. Bergstein: After I had read Bill Shanklin’s article on racing in a wireless world, and after I had seen what Nick Eaves just showed you, presented to me by his colleague Andrew McDonald at the racing symposium in December, I called my son, who many of you may know is at Microsoft, and I said, “I need to get Gates.” He said, “For what?” I said, “I need a talk by Gates on wireless.” He said, “You have got the wrong guy. You don’t want Bill Gates, you want Bob Rapp.”

            Bob Rapp is director of Microsoft in the mobile and embedded devices division with focus on strategic enterprise planning. He spends most of his time with a few key customers each year, understanding at a very deep level how they use Windows mobile and embedded in their enterprise. He spends much of his time at Microsoft working on new, different areas of Microsoft business. He has had the pleasure of working with customers worldwide in 40 countries, and it is my great pleasure at this time to introduce Bob Rapp.

Mr. Rapp: As you guys know, with an introduction like that from Stan I can probably just sit down now because I can’t really top that. This is what I know about your industry (holds up movie). This is the sum total of my knowledge of your industry, it is called “The Black Stallion.” It is a terrific movie. This is the young black stallion, which I just downloaded while I was sitting here in the meeting next to my colleagues from Woodbine.

It was interesting over the last couple of weeks as Stan and I and Al Bergstein talked about horse racing, it occured to me that there are a couple of things that I could actually add to this discussion, none of them having to do with horse racing. Most of them have to do with how the world is changing. In the world of entertainment, where I spend a lot of time, because at Microsoft I have gone into the new investment areas pretty much 100 percent of my time, things are changing. So about $18 billion of Microsoft investment accounts for the Internet space projects that I worked on—digital TV and all sorts of things.

As I got to thinking about horse racing, I thought horses are beautiful and apparently they go around a track. I went down to Emerald Downs last weekend with my wife, Shari Smith. She and I went to Emerald Downs for our first time and we went to look for the horses. I don’t know if you guys know, but there are no horses there right now. Apparently somebody stole them. There were some TV screens that I was not able to actually see and some people that looked like they had been there a while, and I went up to what looked like an ATM machine, except it took my money instead of giving me money. I asked Shari for two random numbers, which I thought was a good way to bet, and in about seven minutes we lost $20, and then we left. It was probably good for the owners of Emerald Downs. It was not as good for me, so I started thinking about the entertainment experience and I wanted to talk about what I know about, which is the wireless business.

            I am 41 years old, and I had never bet on horse racing before my trip to Emerald Downs, but I bet all the time on other things. Sherry and I go to casinos around the world and I play poker. In fact, at my local barbeque joint that I go to every week, there is a way that I can win my way into the World Series of Poker. That is actually what I have done the last three Monday nights. It did not cost me anything, except I bought a bunch of liquor, and played cards along with a bunch of people who did not know how to play cards, along with me. So, I actually participate in gambling. I do not know about the sport of kings, but I do think that there are some things that I have been asked to talk about that maybe will be helpful today.

So here is the official topic - Wireless: Where it is, where it is going, and what racing can expect. I have handed out, by the way, some devices. If you have a device, could you just hold it up? Look at it, turn it on, play with it, and hand it back to other folks so they can play and touch and feel these things. There is just about $6,000 worth of devices wandering around the room. I was told by a couple of folks that was not smart to do in a racing crowd, but I trust you guys. You seem like nice people. These are the latest and greatest devices. They cost from about $500 to $1,000, but for mobile operators, they cost somewhere between $0 and $300. They are heavily subsidized. You may think of them as blackberry, you might think of them as Palm, or Microsoft pocket pc.

I am going to talk about where wireless is today, what is happening in the next three to five years and what you can expect, what that means to your bottom line. Thanks for inviting me. This is a great place. My VP said, “So let me understand this. You are going down to Palm Springs to talk to a bunch of folks who run the racing business in North America. Why?” I said, “Because I think it is pretty strategic and also because Al Bergstein asked me to come along.” Anything that Al wants at Microsoft, we all have to do.

Secondly, thank you for last night. As I talked to a lot of you at the reception last night, you helped me understand issues in your industry. I understand, by the way, that you are a heavily regulated industry. You are a very expensive industry to run, meaning that the horse racing business itself is quite expensive. You also are regional, so you sort of own territories in a world that is less and less focused on territories. The good professor, who spoke to us a few moments ago, said it very well—this is a business that is changing very rapidly, and if you change, you will be able to have the kind of industry leadership that you would expect. It is a lovely location, so with that, lets go on to the content.

Microsoft is in the wireless space and in the embedded space. Lots of people say, “I thought Microsoft made Windows for desktops.” We do. We also make Office. Those are the two big drivers of our business. That is where most of our money comes from, but that is old business for us. The new business for us is Windows everywhere you don’t expect it. So my division makes Windows in cell phones, rocket launchers, sewing machines, heart monitors, things like that, in places you would never expect to see Windows, that are embedded, real time systems. We are going to have time to think about some of the things that are going on. I have actually made a little video. It is my best effort at a horse racing video on a mobile device. We are going to see how it goes. My wife can tell you that at about 2 this morning, she told me just to come to bed because it probably was not getting any better. Then, I can have time for questions, hands on with the toys, and then I am here today strictly to answer questions with you all about how Microsoft can be involved with your industry.

I am already working with Cantor Fitzgerald with some of the work that they are doing. We have folks that are working with them because they have real thought-leadership in some of the things that they are doing. Also, with Woodbine Entertainment, those guys have been doing some really interesting stuff, and we have been working with them to understand their business better and to make our software better, so if you have ideas, I am around this afternoon and would love to talk to you.

This is what we do—our mobile stuff is part of all Microsoft products. It doesn’t just sit in one place, it is actually built into all device experiences. I wanted to show you this. This is sort of everything we have ever thought about making all in one place, and this is kind of the ecosystem that we live in. Just like at a track, you have an ecosystem of owners and players and operators, this is our ecosystem. I just wanted you to see that we have some devices that you might have seen before. If you have seen a pocket pc or palm device, we have about a 60 percent market share in this space now. Palm is the company that created the space. We are the company that monotized the space, is what we like to say. In the smartphone business, nobody has a dominant market share, just so you understand. In the smartphone space, Nokia, Palm, and Microsoft all three have single digit shares, meaning 10-12 percent for all of us, because it is a new space and we are not sure who is going to win. So what I would say is this is a time to think about looking at these platforms and deciding how you are going to bring richness to the environment. This is a set of platforms that we have, and I am actually going to give this deck to Stan because it has some market research in here that I think would be pretty interesting for you. You guys can get it later, so you don’t have to take lots of notes and worry about that. What I wanted you to see is that we have got global momentum, as a company, with an amazing share both in who owns our devices, who is making our devices, which mobile operators are putting our devices in the market, and the big news is that we have approaching almost half a million Windows mobile developers. This means that when you write an application for your track that deals with whatever it is that you are focused on, there are a lot of people in the community that know how to write that software. There are a lot of people that use the devices already and can write the software. With that said, I talked to some of my analysts, and we have got relationships with all of the big analysts, and I tried to give you the most interesting net out of what I understand the wireless business to be in gaming. When I say gaming, I am not specific to horse racing. Juniper Research says that they think lotteries will be the largest money spinners, with the gross revenues to be about $8 billion in 2009, followed by sports bet at about $7 billion, and casino style gaming at about $4.5 billion. This issue, by the way, this is related to the wireless users market. So, on a mobile phone, these are the top three things that Juniper believes will be number one. I broke it down a little bit. I talked to another analyst, and I said, “In Europe, today, what are people actually doing?” I don’t know if you guys follow the wireless business, but generally in Europe, the wireless business is about 24-36 months ahead of North America, as far as how people use devices. Asia is actually a little further ahead too, but in different ways, so the equivalent numbers say, if you are looking at this. I netted it out up at the top, gambling plus online games, about 14 percent of users in Europe pay money today to play games that either have risk involved are just for fun. When you get just to wireless gaming, we have something that says across Europe, it is somewhere between 2 and four percent of users bet money on a phone legally. That is the distinction that this analyst wanted to make with me. 27 percent do something that we call “other.” I would suggest the “other” would bet the behavior that says money has changed hands, but it has not gone through the legal mechanisms. You guys are more aware of this problem. As Mr. Shanklin said, someone is at your track, watching your race, drinking and eating at your concessions, but betting with somebody else. The indication from my analyst is he thinks that behavior is as high as ten percent. We are not sure since it is not trackable and illegal, but just to sort of say what the size of that market is. The third one from Strategy Analytics is the one that I was most interested in. I am not a quantitative guy or an accountant, I am mostly an engineer, but I thought this was interesting from a data point of view. Right now there are about 1.3 billion cell phone customers in the world. That is of all types of cell phones of all type of capabilities. By 2009, about 2.3 billion people will be using a cell phone. That said, in the gaming space, here are the top spaces again, lottery betting and casino, and again the analysts make a distinction, but not a huge distinction because if a user feels comfortable enough that it is a secure device and secure network and that their password information is secure, once they are risking money for one of them, we believe from an analysts point of view that they will risk it for any of them. So the distinction between a horse race and 21 to an analyst is pretty low. I know for you guys it is big, but what I want you to see is the growth. This says that the addressable market for betting, we think all up by 2009, is about 200 million users worldwide. You can say approximately 20-30 percent of that market is likely to be North America. We are a pretty rich market and a pretty big market. If you look for what the revenues are, these are big numbers, up in the 12-13 billion dollar range. Now, I always like to discount a little bit what the analysts tell me because none of us can see into the future, but these guys are pretty good at looking at past trends and deciding what that means. This, by the way, is interesting because of Nick’s work on the tote application, where they would have a PDA at Woodbine, where they would hand it to a user, his users are actually much higher, almost twice as high as all users in actually betting on a dedicated device. This is very interesting to know. Also, apparently from Woodbine’s numbers, you are almost twice as high as the industry average to be carrying a mobile enabled device. Your bettors are a very sophisticated bunch of folks, which tells us, at least the folks that you are interviewing here, that if you look all up, and we would say these two quadrants we care about, 21 and 13, these are the two segments out of all people that use cell phones are interested in doing some sort of gambling on their devices. It is pretty interesting, and by the way, Woodbine’s numbers are just about double that. This is from the same analyst as the numbers before. This is the final one. I tried to have them break it down for me, and this one, I am not sure where you want to draw the line. I did not really think entering a contest or a sweepstakes had much relevance to this group. To me, it is just gambling.  About a third of all people in the world would like to gamble on their personal devices.

Who has this device? Go ahead and hold that up. Look at this device, just play with it a little bit. What is one thing you can do on this computer? You can use Excel and Word, like a computer. Wi-fi network, so you can make a phone call or get streaming video.

By the way, I tried to get streaming horse racing video. Many of the sites wanted to know three things from me that I found very frustrating. Social security number, driver’s license, and date of birth. You know, I don’t even tell my wife the day I was born. That is the kind of stuff that I do not tell, personally identifiable information, and in the European Economic community, it is illegal to ask that information. In North America, it appears to be a requirement to give a SS# and a date of birth. For me, it is not going to happen. So, I am clearly not the target customer, because people that are used to doing online transactions would not do that.

Now, you can do wi-fi access, you can do streaming video, what are some other things you can do on these devices? Who has another different device of mine? Here is a little phone. Everything you can do on this thing, you can do on that thing. This is about $1000. That is free or about $100 worldwide. The only difference is that you can’t do wi-fi on that device. When you think about it, you start asking yourself, what are the rich things that we can do on devices? Well, I have a little video, and I admit it is probably not going to be a great video. I know you are never supposed to apologize to the audience, but you guys are a tough crowd. That guy from London, man, I was scared after I heard him. I was like, oh no, they are going to ask me stuff and make me cry. Be gentle.

Here is what I did last night. I wanted to show you some stuff that you might do at Woodbine, for instance, or at the Big M. You might have, for all of your special users, people that are part of your club, you might customize their device. The ring tone business in the North America is about a $2 billion business right now. So I went and got a picture of a horse and made it trot, because this is the trotting association, you see. Are you with me? Watch it run, and this is very exciting. You might put some jokes on here. I played a great horse yesterday. It took seven horses to beat him. That is a great joke. You might, potentially on this device, maybe this is not at the racetrack, maybe this is at home, remember since it is location insensitive, I want to have what I can do anywhere I am, and if you want me as a customer, you have got to understand me as a customer. You might send to someone a tip sheet. Everyday in a piece of email, they get a tip sheet that says, “Seattle Superfast is the best racer or the worst racer and here is some new information.” You have lots of industry information. I put Camptown Races on my phone, which you can’t hear, but it was very nice. A little ringtone, download it for $1.29. There is some additional revenue. You might actually send out a schedule plus from your racetrack to say, would you like us to populate your calendar with all of the racing activities that are taking place automatically. Just have them show up. Why not? This device becomes, again, personalized for the racing fan.

I could send out a piece of email that says, hey we got your bet. Here is your bet. It is all okay. Which it sounds like you are doing at Woodbine, but it does not sound like that is being done around the industry. That is what happens to me when I spend money today. That is the normal experience, right? I bought something, you told me about it.

I tried to stream, and I did go to thebigm.com, and it did take a little while to get there, the problem is that most Websites are not ready for my device. They do not know that I have a 2 MB connection, I have a full video screen, and I have the capabilities to see all the video that you want to send me. You could even charge me for it. You could secure it. But when I get to these sites, most of them expect me to be a big, full computer, and they don’t understand that in my hotel room, I am still capable of spending money. I am spending it at your track, even though I am not sitting there. When I went to the Big M, it is a really cool site, and I went there on my laptop and I was able to do lots of useful stuff, but I just wanted to see if you understood me as a customer. Whoever it is for the Big M, I don’t want to be critical and I don’t want you to beat me up later, but you did not understand me as a customer because when I got here, this is what I saw, which is something that did not understand there is an easy way to recognize that you have a mobile device. You present a less complex screen to say, hey, do you want to make a bet, do simulcast, those kinds of things.

I might even want to call somebody, so I am going to go ahead and call my wife and tell her, “Hey, do you mind if we put a $1000 bet down instead of a $2 bet,” because that seemed like a great idea based on how well we did last time. There she is and I am calling her right now on my computer. It looks like a computer, but it is, in fact, a phone. I am not sure she is going to take this call, based on how we did last time. I am calling her at home. It doesn’t look like she is picking up. Yeah, she was not impressed with my picks. I, by the way, picked the two worst horses just randomly. It takes some skill. There were like nine horses running, and I got the two that did not even leave the gate, so that was bad.

People that like horses and like horse racing also would probably like to have a picture of the winning horse. Hey, your horse just won. When they won, here is the video of them winning. That is the kind of stuff that connects your people to you, so that they spend money with you instead of with someone else. Almost every device that ships today that in Internet capable also has a camera. The cameras are getting really good, and the ability to view things is getting really good.

You might actually have an update. This is a web service for Royter’s News that just could as easily be sporting news. It comes directly down. You guys already have subscription services, you have a big satellite network. You have races that you show, but why not give me all of the updates from all of the industry press that would update my device and make me feel connected to the community, and choose to bet on horse racing instead of casino gaming or another entertainment venue.

Two more things that we are thinking about here, and again, I am not sure if all of them are doable today. There is a Napster service, and I tried to show it here, but it just doesn’t show very well, but you could actually affiliate your video and send your video down to Napster and you could actually sell it to folks. They could actually take it with them.

Does somebody have the square, silver device? What are you doing on that device? You are just watching a movie? Hold that device up again, I want you to see that. That is called a portable media center. That device has on it the capability to have 100,000 songs, all your digital photos and 80 hours of high-quality video. I want you to look at that, and I will have sort of a toy chest at lunch today so you can come play and touch this stuff.

To connect to the race fan, you have to syndicate your content and your relationship to the experiences they live in, the places they live. These technologies allow you to do that. This video is a very simple video. It is my take at it, but I also want you to understand that on the right side of the screen here are companies that have syndicated content to consumers and are using something called digital rights management. Digital rights management, lots of you probably know a fair amount about it, but if you don’t, what it says is I can go to CinemaNow, download a movie, watch that movie for 24 hours, and when the 24 hours is up, it deletes from my hard drive automatically. If you imagined that somewhere here would be your association in the drop-down, and your racing fans would have access to this most popular media player in the world, they could just go out and get the things that they wanted. That is going to take an association-wide kind of experience, not individual owners or individual tracks. It is going to take a consortium to say, hey, in the horse racing business, come here. But what this has done is, for Napster, it has changed the game. You can now listen to a million songs for a monthly subscription price. It is the way that the business is changing.

I will give you a couple of observations. Here is what we know from our customers across all types of businesses, not specific to your business. Number one, users demand mass customization, meaning they want to experience things that relate to them wherever they are. While they are riding between their airplane to their hotel on a shuttle, they could place a bet, they could watch some video, they could check their account transactions. We know that to be true. That is a rapid phenomenon across all parts of our business. They demand security that is anonymous. When you start to ask for personally identifiable information, you get into a place that excludes a whole generation. I can tell you I will not give you my social security number and I will be darn sure to tell you that my 17-year old nephew, who spends about $200-300 a month online, is not going to tell you anything about him that you don’t need to know. He doesn’t want to share that stuff. It is on demand. They are used to tevo-like interfaces, right? They are used to easy press-and-play types of interfaces. They typically hang out in a community of other like-minded people. So, a very common way that people spend time these days, and I am saying in the 40 and 30 set, which is a prime spending market, is in like-minded communities. When I go home, I often log onto the X-Box network and play a game called Halo II. I have a group of buddies, a cop in New Jersey, and a scientist in Venezuela, and another friend of mine down in Florida, we go kill people at night. It is a lot of fun. We organize within a community. We are called “The Sexy Beasts,” which I think is a pretty good name. I came up with it. We are pretty old and slow, but we are good with the sniper rifles. And just to give you a sense, Halo II has sold now 7 million copies at $50 per copy. These are people spending real money in entertainment, but they want it online, and they would be a perfect candidate for Real Time video to that X-Box—horse racing experiences on the X-Box. It would be amazing, but you have to respect the way they want to work.

There was no reason for me to go to Emerald Downs. I went to Emerald Downs because, talking with Nick, he said, “Well you should probably go and see what it is like to bet.” But when I went to Emerald Downs, I realized there was no reason for me to actually have shown up when I could have done that all remotely. There is nothing wrong with Emerald Downs, there is something wrong with me. It is how I want to spend my money.

What are the likely consumer side sales? Now there is a whole other discussion that we have not talked about, which is the automating of you operations, the reducing of churn, how you make a better experience with wireless kiosks. Like when you go rent a car today. When you go to Hertz, you don’t stand in line, typically. You go to a car, if you are a member of their loyalty club, that has your name on it. When you drop the car off, there is someone who has a little wireless Microsoft device that slides the card in and you are done. That is the experience people expect.

That is not the stuff I talked about today, I am just talking about consumer siding. The ring tone business is a $3 billion business, the wireless side of off-track betting is a $3-7 billion business. The streaming video business, depending on how you think about it, drives the two above businesses. For me, it is about feeling special. The reason that people go back to the casino or go back to the sports bet or whoever is that they have some reason to be loyal and to come back time and time again.

As far as information, handicapping, I am not sure about the potential market, and I am not an expert on that. You have got some good folks that are.

The big issues, I think it is worth checking in on these. Again, as you go through your meetings and the other things that you are going to be doing here, some things to think about is that there are some new laws. There is a law in the health care industry called HIPA. Anybody been to a doctor lately and had to sign a form? Did you read the form? The form said I can’t tell you anything about you to anyone else unless you tell me it is okay. I don’t know if you noticed, but in the paper this morning Lexus Nexus let information about 30,000 people out into the public and people had their credit rating stolen. So this is big news.

Things to think about from a policy perspective, which is the purpose of this group, is to make the business safe and fun for the end user, that person that is making the bets, is who? Do I really need the information about this person, and do I store it in a way that it is secure. What? The security of the network, I can say that right now SSL is the standard. SSL is a very weak form of security considering the amount of money that we are talking about in your business. We are thinking at Microsoft and we are on standards committees working on things called RFID or near field communication or smart cards or biometrics, things that say that this device, when combined with my thumb print is secure. When you look on a lot of our new devices, there is a thumb reader. There is also an optical eye reader. There are all kinds of other biometric things that say that if Nick gave me his device like this, I would have to have some other kind of identification that only I knew that was easy for me to remember and hard for anyone else to fake like my retina. Now, that scares a lot of people. From a public policy sense, it probably should. Practically, it is what people want to do. They are tired of passwords and usernames. Probably of all the standards to watch in the next year, near field communications is the one that I would be thinking about. What it says is that this will serve as a smart card. I can walk up to a vending machine, I can walk up to a whatever, and get my car back, make my purchase, make my bet.

GPS, I actually did not show it. The way I got here yesterday is this GPS, which when I run, goes on my head, like that. It is like a little hat. This GPS is about $100, and I can throw it in the front of my rental car, and with this device I have a map of the western US and Canada. It is a detailed street map. I can look up your address, and I could tell you how we would route from here to your address based on just this sensor, which is inexpensive, and this device, which is my GPS in my car. This is pretty wild stuff, but this is what people are becoming accustomed to doing. So, what if you put this on each horse? GPS’s do time and speed. There are watches now that runners use that cost about $500 from Sunto that do time and speed. So what if you put this on every horse or you had some way to track their performance over time? Again, this goes back to relationships with your customers. The other thing is some people in the gaming industry, from an anti-fraud point of view are building into their kiosks anti-fraud technology to say if this device is moved it is turned off. I know you have barriers and regulation to competition. I suspect solutions, as always, come back to deep customer understanding. You guys know the customer you have today. What I would suggest, and this may be a bold suggestion because I am new here, but is that you need to know the customers well that you don’t have. The ones that have never been to a racetrack, that use technology well, that spend a lot of money, and really would love your experience. I can tell you that what Shari and I said when we went to Emerald Downs is that it is gorgeous. We get it. We understand that there is no horse racing because although it is sunny in Seattle right now, it is normally pretty dreary and rainy, but we think it was beautiful. It was a lovely place, beautiful grounds, nice facilities, and we could imagine that watching the horses run around the track would have been a really inspiring experience, but we had never been inside the gates of a racetrack. We just did not know about it. There has to be some way to attract us using these tools and toys.

What questions do you have for me? I have covered a lot of ground. Hopefully it has been useful. How I can be helpful.

What is next? In Germany today a phone was announced by Samsung that is codenamed Thor. Thor is the size of this phone right here, which looks like a phone, and is a phone, but is also a full functioning computer, has the same computing power as many laptops, but the Thor device has a 20 MB hard drive. If you guys understand what that means…What that means fundamentally is that the game has changed. I can just take this on a trip now and I am good. Remember when people talked about units of computing work and that little block that you connect into a screen, Apple released one a few months ago. If you have seen it, it is a little, tiny computer that has all the stuff you need. You can pack it into a bag and go anywhere that you have a keyboard and a mouse. This is the same thing for the mobile industry called the Thor. This is a prototype for Motorola which will be released on the razor platform. It is pretty wild stuff. The other thing is appropriateness of location. So if I know, for instance, that this device is near a projecter, near field communication might just say that when I set it near the projector, it projects to the screen behind me. Or if I have a big screen TV and I drop it near a big screen TV, you can just use the optics on that big screen. There is obviously security and authentication and should I be able to use other people’s resources for these units of work, but it is pretty exciting. By the way, this is a six-month business, so we have revolutions in the mobile industry every six months. We are not like the computer business which is every two years.

Europe and Asia are ahead in the mobile space in technological developments. In the mobile space it is very much true. There are two reasons for this. The United States has had a habit, and by the way I am very proud to be American, our industries in the wireless space in the US made a decision a number of years ago to be proprietary. So, AT&T Wireless, Macaw Cellular, which was the first wireless network, rolled out a kind of network that is different than the networks anywhere else. Cingular and all the others have followed the lead. So the US is kind of a strange place in that we now have a GSM network, which is a standard for Europe and Latin America and much of Asia, that folks have been benefiting from for about ten to fifteen years in Europe. So with one telecommunications standard in Europe, partially because these were regulated monopolies, and the wireless business in the US was an unregulated wildcat, Europe has had 600 million consumers all buying phones and network access and very common things so it is a very big addressable market. In Asia, particularly Japan has had more innovation that is not necessarily all positive. Folks in Japan are much more willing to try things before we are in North America. They have a very high p ratio. They like change a lot. Lots of things that go on in Tokyo are really big failures. The downside for the US market is that we are not driving the world with wireless technical innovations, we are waiting for the rest of the world to set them and then we are building sort of copycats. This is kind of the reverse of where we were 20 years ago, and it is not true in all parts of technology. It is in the wireless space.

Battery life—the phone right here has five days of battery life. It has a full megapixel camera. It has fast connectivity. It has a gig of storage, so I can watch a full DVD movie on this device. It has 5000 contacts in it and it runs for a business week. So when I go to Europe, I take this phone with me without a charger, which is a bold move. You guys ever wonder if you should go without a charger, especially if you have a datacentric device like that? Would you do it with something like this? This has about a day of battery life, and the difference is innovation. Microsoft has a five billion dollar research and development program and we ask our brightest engineers to tell us how to make batteries last longer in cell phones. It took us about 36 months, and we think it cost us about $100 million, we are not sure, but it cost a lot, and we came up with a process to make batteries last a lot longer, which is patented and which we are sharing with the cell phone industry.

Question: Does your analyst tell you when the barriers are depending on how many different devices they want to carry. One of the big problems has been visuals on the screen. How ultimately when you are in the content business, like we are, do you decide which platform to use? How do you differentiate?

Mr. Rapp: Well, you should never believe vendors, right? And it is hard for me as a guy from Microsoft to say anything that would be considered objective, so I will not even try. What I can say is that I think it was the guys who wrote Java who came up with the notion of write once, run anywhere. That is what you should look for. Java, which is supposed to be write once, run anywhere, turns out not to be so much. Qualcom turns out to be very good at that, unfortunately they are limited in the phones that they actually appear in be the Qualcom chip sets are not the broadest accepted chip sets, GSM are. So the Microsoft strategy is to be agnostic about the devices, but to say that when you write on a Windows platform, whether it is a desktop or it looks like a phone or an ATM machine or a dedicated betting machine that you have at your track, you are dealing with the same developer community, the same operating system, and all of the same rules, so we would say that you have the biggest addressable market out of the gate. We have a 60 percent market share in the embedded space, and we address, of the 1.6 billion devices that will be purchased this year, about 900 million of them out of the box. That is pretty amazing. It is a big place to be, but what I would say is talk to folks who are doing it. Talk to Nick Eaves. These guys are rolling out something that, based on the chart that he showed about revenues, and how they have gotten those revenues, that is a chart that if I show that at Microsoft, I get lots and lots of kudos for making my business grow the right way. I am keeping my customers coming back. They are betting in new ways. They are doing new stuff. So talk to the folks developing applications and I think you will find overwhelmingly people not just in this business but FedEx or UPS are using Windows mobile because it is very cost effective. It is not because they necessarily like us and want to give us more money. The three bucks that we make on every device we think is a fair price for rapid development and ease of use. The other thing to remember is that whole question about which is the right device, I think the Gem, the little silver device, might be it. That is the size of a smart phone, and it is in fact a full pocket pc, which has about a 4-5 day battery life. T-Mobile just ordered 400,000 of those in their first order. T-Mobile in Germany is probably the most difficult mobile operator in the world because their standards are so high. They are very demanding, a very tough customer, very smart, and they do a really terrific job. They think that is sort of the ultimate convergence device. That is why I brought it. The device is made by a company called HTC. Everybody always asks me for stock tips, and this is always my stock tip. A company called HTC, which is really just 300 PhD’s and really smart folks who sit in Taiwan, builds the designs for lots of companies around the world. So, how many people are carrying a trip device? That device was manufactured by HTC, and much of the design was done by them. How many people use Hewlett Packard devices? Almost ever HP device was either designed or built by HTC. If you start looking at the other devices, almost all of the competitive devices in the industry come from the same 300 really talented people. It is a public company. Trade it on the Taiwan East stock exchange. I, unfortunately, can’t buy any of it since I am in this business, but maybe you can benefit.

Question: From what you are saying, the idea of being affiliated with promoting gambling would not scare Microsoft off. It would have a few years ago.

Mr. Rapp: I would say this—Microsoft has worked with Harrah’s, and I think actually Al Bergstein, when he came a few years ago, I read everybody’s remarks from last year’s conference I was sort of trying to get the threads, Al’s speech a few years ago talked about all the things that Microsoft has done in the gambling space. In fact, Bill Gates is an owner or partial owner of some casinos, personally, not Microsoft. Remember Microsoft is generally what we call an ingredient supplier. For instance, in this phone, the software is produced by Microsoft, the phone is designed and built by Motorola, and it is commercialized in the US by Cingular. If you think about us as a partner, that is the way to look at it. I was talking to a gentleman who is in Vegas who does security devices for gambling, and we have partners in that space that are trained on our operating system and our development tools and they deploy these systems, but Microsoft per se does not go out and sponsor gambling just like we don’t sponsor health care or medicine or other things. We think gambling is terrific. The chief architect of fun, which is his internal title, but the chairman of my company, Bill Gates, is an avid gambler. I don’t know if he bets on horse races, but as a company, Microsoft is generally not in the limelight in sponsoring really anything. We just have people that we supply software to. Remember 97 percent of all the money that Microsoft makes comes from a partner. We don’t sell directly really to anybody. You don’t buy Windows from us, you buy it from Hewlett Packard or from Dell or from whomever. That is our business model, so we are not against it, but you can’t infer from me being here that we have said we think we are now in the wireless gaming business. We are not.

            Think about the most interesting application that you could do in your business, and your business, by the way, we have some regulators here, we have some folks that own horse tracks, we have folks that own horses, we have folks that supply all those businesses, and it is a pretty broad range of people, the most interesting business idea that you can tell me you would be interested in using one of these things in today. If you come up and tell me about it, and you allow me to come and talk to you about it later, I will give you a free device. By the way, the way we decide on this drawing, it is not pari-mutuel, it is me. I am going to decide. That is one incentive if you guys are interested, because my job at Microsoft is to go find new places where our stuff can be used and then get it perfect for that space, which is not a bad gig. Thank you very much. It has been a pleasure. I am excited to be here. I am hoping to see an actual horse race at one point, if you guys could point me to one that would be neat. I would enjoy talking to you over lunch, and as always, it is a pleasure to be in front of such a great group.