annual report
annual report
Letter to Shareholders What It Means Financial Review   
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to our shareholders

Microsoft had another remarkable year in 1998. We made major advances in all our key businesses. The demand for great software that helps people work, communicate, and learn is stronger than ever. Our products are doing well because they deliver on these needs.

Microsoft® Windows® 98 is proving a great success. Customers appreciate its ability to work better and play better, while its robustness means that Windows 98 is generating less than half the customer calls of its predecessor. Integrated with the latest Internet Explorer technology, Windows 98 helps our customers leverage the interactivity of the Internet with the intelligence of the PC. Microsoft Windows NT® Workstation is making deeper inroads onto the desktop, based on its productivity, reliability, and lower total cost of ownership. And Microsoft Windows CE, a compact version of the Windows operating system designed for a wide range of intelligent devices, is finding its way into everything from interactive televisions to hand-held computers.

Licensed sales of Microsoft Office 97 are strong, as our productivity applications continue to set the standard for features, functionality, and integration. Microsoft Office 2000, which is scheduled to come out in the first half of 1999, will take each of these factors to a significantly higher level, offering a simpler, personalized interface that learns each user's working style and adapts to it, plus many other productivity-enhancing features. Likewise our development tools continue to lead the market with the release of Visual Studio® 6.0.

Microsoft Windows NT Server and Microsoft BackOffice® applications continue to make solid progress in the marketplace, and are now the clear enterprise solution of choice over the various UNIX-based platforms. Windows NT 5.0 will raise our platform's scalability to even higher levels, while offering customers the lowest possible total cost of ownership. Growth in the Microsoft SQL Server™ database in fiscal 1998 continued, and the launch of SQL Server 7.0 will maintain this momentum. In many installations our enterprise solutions already deliver the level of performance achieved by mainframes, combined with the benefits of the low cost PC model. Our goal now is to take that model even deeper into the mission-critical computing market.

Our interactive media and services strategy continues to advance, focusing on online services, packaged software, and hardware. In Expedia™ travel service, CarPoint™ automotive service, Hotmail, Microsoft Investor, Gaming Zone, and Microsoft HomeAdvisor™ real estate service we are building some of the most powerful brands on the Internet. Our strategy going forward is to unify these sites around the MSN™ brand, so customers can easily reach all of them via a single portal, Combined with our packaged-software products, among them Microsoft Money, Encarta®, and games such as Flight Simulator, our strategy is to break down the barriers between online and offline products and services, making it even simpler and more enjoyable for our customers to experience the power of the Internet.

Another important effort for us is bringing the power of software and the Internet to the television with our WebTV® product. We plan to more than double the installed base to over one million users during the next year based on the very positive word-of-mouth this product has generated.

Microsoft intends to invest heavily in all these businesses, in the firm belief that online services will eventually be a key element of our relationship with customers. But as I wrote last year, online is still at an early stage of development. However, we are learning fast and I am seeing increasing synergy between our online work and our software products.

The power of innovation

Our product goals require breakthrough innovation. During fiscal 1999 Microsoft will invest more than $3 billion in research and development, broadly defined. Our research centers in Redmond, San Francisco, and Cambridge, England, now employ experts in everything from graphics to decision theory and advanced linguistics.

Much of Microsoft's research and development is focused on making our products easier to use, even as the underlying software grows more complex, so our customers don't have to learn as many utilities and commands. Simplifying the user interface is our top priority. The adaptive user interface in Microsoft Office 2000 will tailor each copy of the application to the individual customer, personalizing menus so that your copy of Office 2000 helps you use it in the most productive way. Natural language processing automatically detects which language you are typing in, and assigns the appropriate proofing tools and user interface. If you inadvertently delete some of the application's files, it's smart enough to repair the damage.

Microsoft will also unify and simplify how PCs and networks store and handle information. At present, information is scattered about file systems, message stores, Web caches, directory services, and databases. This is complicated for developers and system managers, and confusing for customers. Sharing a calendar across the Internet, or personal information across Web sites, is very difficult. By unifying storage across all these media, Microsoft will help make information anytime, anywhere a reality. As consumers require all their information to be accessible from any Internet device and any location, the boundary between Web sites and software products will blur.

In time, computers will see, speak, read handwriting, listen, and learn. We will include these new input techniques into our products. Microsoft SQL Server 7.0, for example, already has a natural language interface that allows our customers to search their databases using questions phrased in everyday English.

Caring about customers

To build on our already strong commitment to customers, we plan to increase by $200 million our spending on technical support, information-technology consultants, and other customer initiatives. We are listening carefully and constantly to our customers and partners to really understand what they want from our products and services, both today and in the future. The feedback loop drives our priorities.

This effort is being led by Steve Ballmer, who was promoted to President of Microsoft in July. Steve's job is to ensure that every dollar we spend on technology, product development, marketing, and support is focused on delighting our customers. In recognition of just how central to Microsoft's thinking its customers are, in this year's annual report a few of them will tell you just what Microsoft and its products mean to their lives.

The coming year will test us on many fronts. We need to make our software simpler and easier to deploy as well as making it more powerful. Pressure from competitors and regulators is intensifying. PC sales growth is slowing and a lot of the growth is in the consumer segment where software sales are lower than in the business segment. The growing size and diversity of our product portfolio means that we have to execute across a broadening front.

As Microsoft approaches the 21st century it faces many challenges and risks, but the opportunities are greater than ever. With continued innovation and hard work, I am convinced that we will reap the rewards. I appreciate the unwavering support and trust of our shareholders in these exciting times.


Bill Gates



Last updated May 27, 2010

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