Gates on advertising's future

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On: Video on demand

We still have video distributed over the air [and] through cable using slightly different technology than Internet technology. But Internet technology will be used for this. We have a group that is working with particularly phone companies but now also some cable companies to say just collapse it all into a big package, the voice, video, data.

This means you can pick whatever shows you want to watch. You can have as many hi-def channels as you want. ... The ad insertion becomes totally flexible.

On: Targeting ads

Any ad that is appropriate, given the time that it is being watched, who is watching it, what their interests have been, can be inserted and just be seamlessly included....

Certainly in VOD, a lot of the ads get stale if [viewers] are watching different time slots. Technology ought to be able to do those insertions at the time the thing is being watched. The degree to which technology sort of insists that those ads be watched is one of those things that is up in the air as we are being able to be more targeted at things, local dealer lists, local ways of doing things.

On: Digital video recorders

We should take for granted that people will expect to be able to control what they want to watch when they want to watch it. In some cases it will be server based, so that you don't have to in advance say that you want to record it. There is a certain simplicity there, although the rights issues of that are a little more complex.

So you actually have an artificially large balance toward the home DVR, vs. server-based, for a number of years until that gets sorted out.

On: The DVR home page

The "guide" will become a very key home-page-like asset. Whoever is doing the video distribution will want to use that to promote shows, get attention to things.

That guide becomes more and more strategic, and we're working with partners like Comcast, other cable people, anybody doing TV.... Get into that guide, get it targeted according to the demographic, watch what the response rates are on those things. (Editor's note: Microsoft is Comcast's largest shareholder with a 7.4% stake.)

On: Apple iPod and beyond

Things like the iPod where you just have music are just the beginning. Portable Media Center (Windows Mobile for new devices coming this fall from consumer electronics makers) ... has a color LCD screen so that you have not just the music but photos, videos, movies that you've bought, movies that you recorded....

This has implications for the business model of how the content is funded, the ability to be far more targeted, and nobody has the crystal ball that says exactly how this is going to come out.

On: Product placement in content

We certainly know that relevance and interactivity are going to be a big part of the new model. A good example of how all these media work together is a thing we've done with Volvo. We actually have a great Xbox game that features one of their hot new cars, the Volvo S40. It was so neat that they actually decided to take that and use some of that video game footage in their advertising on TV.

On: Viral marketing

Ads that are cool, that you want to share with people, there definitely has to be a very simple way that that gets done so you can get some viral-type activity there. There are creative ways that different properties can kind of be organized together to have those things create a very broad impact.

On: Cable vs. phone company

The U.S. is actually fairly unique in being really the only major country where cable is the primary way that people connect to the Internet [for broadband]. In every other country, DSL is the primary way that people connect.

The cable industry did get ahead, did make the investment.... The phone companies and DSL will get more aggressive. They will not just offer a pure data solution. We and the hardware guys are giving them technology that they will actually compete for the video revenue stream as well.

At the same time, the cable guys will be given software technology, [Internet] telephony-type things that let them do a very much improved form of telephony. So you'll have a very strong competitive dynamic there.

On: Another Net stock bubble

We are sort of back in a mini-bubble era in terms of people expecting a lot in terms of these valuations. But I don't think we'll see the same exit rate of companies that we saw back in the real bubble.

There are some strong players who are doing things right, and a lot of these models are starting to catch on, whether they are transactional models, advertising models, subscription models.

Then you've got people like ourselves, who are just such long-term players and can bring a lot of invention to bear and learn as we go get these things right.

On: Intrusive advertising

In Xbox, that Volvo thing was a win-win thing, very creative. Some of the ways that billboards and other things are used inside the game are pretty creative. Some of the sponsorships of the contests that we're doing inside Xbox are creative.

But we are just at the beginning in that entertainment realm of figuring out how advertising-and I use the term very broadly-ought to be engaged. We are very open-minded as people come up with ideas that don't seem intrusive, that the user would be interested in.

On: Spyware

We've seen a lot of software that you download for free on the Internet-I won't name names-but people who are just trying to turn the PC into a billboard. In the extreme case, they're called spyware or things that you can't get rid of.

We are going to help users be in control of knowing what's on their system, and if they don't want to have something that is intrusive, getting that off of their system. We're going to make sure that the user gets a lot of those choices.

But then again, even within our properties where it's attracting users, we want to make sure the advertisement things are there. So a lot of cleverness and a lot of learning will have to be exercised.

Bill Gates is co-founder, chairman-chief software architect and 11% owner of Microsoft Corp.

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