2.- MICROSOFT: LEADER OF THE COMPUTER SOFTWARE INDUSTRY
Microsoft was the undisputed worldwide leader of the software industry with revenues of over $25 billion for the year 2001 derived principally from its Windows operating systems for PCs and corporate servers and applications such as its Office package. But the recession of 2001, coupled with the advent of the Internet and the increasing role played by open-source operating systems principally Linux, the increasing level of software piracy, and stagnating PC sales were making the competitive environment anything but friendly.
2.1.- THE SOFTWARE INDUSTRY
Has XBox transformed Microsoft?, by David Becker, Staff Writer, CNET News.com, November 15 2001. http://news.com.com/2009-1040-275784.html?legacy=cnet&tag=xbox_nav Mary Meeker, Morgan Stanley, 6 November 2001. http://www.pcvsconsole.com/news/news.php?id=382&filter=1
Almost nonexistent 30 years ago, the top 500 software companies had $259.4 billion in software/services revenue in 2000.6 Out of that $259.4 billion, the top 10 companies accounted for $163 billion, or almost 63% of the total revenue for the top 500. The computer software industry had always been characterized by its long cycles of product R&D, and its costly marketing and distribution. But, the Internet was changing all this. The advent of Internet languages such as Java and XML (Extensible Markup Language) was speeding up the industry conversion to Web-enabled applications. These applications, so called Web services, were built from standardized building blocks that could be assembled in a variety of ways, allowing companies to develop their own business applications. Microsoft, AOL Time Warner and Sun were all fighting in this new arena. A survey of CEOs from software companies predicted that by 2005, two-thirds of all software would be distributed over the Internet, compared to just 12% in 2001.7 Microsoft responded to this challenge with its.Net plan including new releases of the company's Windows operating system, called Windows.Net Server, and other server software and development tools providing a framework for making programs more Internet-aware. New hardware developments were also putting pressure on the incumbents of the software industry and Microsoft in particular. Personal Digital Assistants (PDAs), mobile devices, pocket PCs and even digital video cameras, all required new types of software. This let the door open for new competitors to enter, while forcing the major players to adapt faster. Sony, a major player in the consumer electronics business, had all along avoided using Microsofts operating systems (except for its portable desktop) and instead relied on other operating systems. Piracy had plagued the software industry since its infancy. Piracy reduced margins, cut profits, and affected the whole of the industry, from software developers, retailers, and ultimately to all software users. The estimated worldwide monetary loss due to piracy was almost $12 billion in 2000. During the 1995-1999 period worldwide piracy levels8 fell steadily from 45% to 35%. However, this downward trend stopped for the first time in 1999, and worldwide piracy levels rose to 37% in 2000. While Microsoft dominated in operating systems and applications for desktops with a worldwide market share of 92-93% in 2000 and 2001, the situation in the market for corporate server-systems was more uncertain. Linux, an open source operating system, had become number two in this segment in 1999. Though still behind Windows NT and later versions, it was expected that Linux would pick up share at the expense of Microsoft9 inter alia as a result of the backing from a number of heavy players such as IBM.

2.2.- MICROSOFT BUSINESS DIVISIONS Microsoft had been in the software industry for over a quarter of a century. During that period, Microsoft had grown and evolved adapting to and often leading the many changes the computer and the software industry had undergone. Microsoft initial vision was to place a PC on every desk and in every home running Microsoft software. However, with the advent of the Internet and the development of related technologies, Microsoft realized it needed to be more than just focused on supplying operating systems and applications to personal computers and servers. In 1998, Microsoft changed its vision to Empower people through great software - any time, any place and on any device. Although Microsofts main business involved developing, producing, distributing, licensing and supporting a wide range of software products for a multitude of computer devices, Microsoft took
Softwaremag.com. June/July 2001, The 19th Annual Software 500. Business Software Alliance Survey of CEOs of Software Companies. Business Software Alliance survey, 2001. CNET News.com, July 24, 2000,
part in many other activities such as producing hardware, providing training and consulting services. Microsoft divided its business into four semi-independent business units reflecting the diversity of its operations. The four business divisions were Desktop and Enterprise Software and Services, Consumer Software, Services, and Devices, Consumer Commerce Investments and Other.
DESKTOP AND ENTERPRISE SOFTWARE AND SERVICES The Desktop and Enterprise Software and Services business division represented 89% of Microsofts total sales in 2001. The Desktop and Enterprise Software and Services division was divided into three sub-divisions: Desktop Applications, Desktop Platforms and Enterprise Software and Services. The Desktop Application and Platform divisions dealt with all Microsoft software products that ran on a desktop computer: operating systems, programming languages and office applications such as Word and PowerPoint. The Enterprise Software and Services dealt with the products and services destined to enable and support the vast majority of Internet and Intranet operations of small to large companies.
Desktop Applications The Desktop Application division represented almost 38% of Microsoft total sales in 2001 and grew by an average annual of 11% over the period 1998-2001. It also offered other stand alone applications such as Microsoft Project, a project management program for scheduling, organizing, and analyzing tasks, deadlines, and resources or Microsoft Visio, a diagramming program that helped people visualize and communicate ideas, information, and systems. Through Great Plain, Microsoft provided its business customers with software that offered a range of integrated business management capabilities and accounting. Microsoft bought the accounting software specialist for $1.1 billion in April 2001. The Desktop Applications division also included bCentral, an Internet portal that gave small businesses access to a range of tools to help them manage their activities online, such as Web page design and editing, sales and marketing. The Desktop Application division faced competition from a number of sources. These included the big software application vendors, such as IBM (Lotus), Oracle, Apple (Filemaker, Inc.), Sun Microsystems, Corel, Qualcomm, and some local application developers in Europe and Asia. IBM and Apple also preinstalled certain of their application software products on various models of their PCs, competing directly with Microsofts desktop application software. Sun Microsystems Starr Office was also very aggressive with its pricing, offering a free download from the Web or a nominal charge for a CD. Additionally, Web-based application hosting services provided an alternative to PC-based applications such as Microsoft Office.

Desktop Platforms The Desktop Platforms division represented almost 32% of Microsoft total sales in 2001 and grew by an average annual of 13% over the period 1998-2001. The division regrouped all past and current operating system products that Microsoft had developed for its personal and business consumers. These included operating systems such as Windows XP launched in 2001, Windows 2000 Professional the successor of the Windows NT, and of course Windows 98, the successor to Windows 95.
Microsofts operating system products faced competition from a variety of companies, such as IBM, Apple Computer, Sun Microsystems. Many of these operating system software products were also licensed to third party Original Equipment Manufacturers for pre-installation on their computers. With increased attention toward open source software, the Linux operating system had gained increasing acceptance as well. Several computer manufacturers preinstalled Linux on PC servers and many leading software developers had written applications that ran on Linux. Microsoft Windows operating systems were also threatened by alternative platforms such as those based on Internet browsing software and Java technology promoted by AOL Time Warner and Sun Microsystems.
Enterprise Software and Services This division represented 19% of Microsoft total sales in 2001 and grew by an average annual of about 20% over the period 1998- 2001. The Enterprise Software and Services division offered Microsofts set of programming languages and a wide range of server products destined to enable and support the vast majority of Internet and Intranet operations of small to large companies (Web site management, e-mail, Internet Proxy, firewalls, etc.). The Enterprise Software and Services division also offered firms a set of consulting services to help them plan, build, deploy and support their technological projects. There were numerous companies and organizations that offered Internet and Intranet server software, which competed against Microsofts business systems. In the programming languages segment, Microsoft competed against offerings from Borland, Macromedia, Oracle, Sun Microsystems, Sybase, Symantec. In the business of providing enterprise-wide computing solutions Microsoft competed with several competitors such as IBM, Hewlett-Packard, and Sun Microsystems. These companies were offering operating system software for mainframes and midrange computers, systems that were typically support-intensive.

CONSUMER SOFTWARE, SERVICES, AND DEVICES This division represented almost 8% of Microsoft total sales in 2001, but had been growing at an average annual of 20% since 1998. Consumer Software, Services and Devices included the MSN portal services, the entertainment products (PC games and the XBox), the mobile device software products and the multimedia learning-tools. Microsofts MSN services included a host of Microsoft Internet tools such as Explorer, Hotmail and MSN Messenger. MSN also included content services such as MSN Money, the online personal financial service, MSN Music that helped consumers to find, to discover and to listen to their favorite music, and MSN eShop a one-stop online shopping resource. Microsoft offered a wide range of entertainment products from classic software games, to online games, simulations games (Microsoft Flight Simulator), sport products, and strategy games (Age of Empires, MechWarrior). Microsoft had also built a gaming community on the Internet, Zone.com, that allowed multi-player gaming competitions of Microsofts games. Microsoft multimedia learning products included multimedia interactive encyclopedia, world atlas, dictionaries etc. Microsoft had also developed special products for children, such as My Personal Tutor. Microsoft developed a number of software for mobile devices. Products such as Pocket PC, Microsoft Mobile Explorer, and Microsoft Smartphone platform (codenamed Stinger) were designed to enable a variety of mobile scenarios.
CONSUMER COMMERCE INVESTMENTS Operations in this segment started in 1998, and revenues had been growing at a Compound Annual Growth Rate of 151% since. Still, in 2001 Consumer Commerce Investments represented only 1% of the Microsoft total sales. Expedia.com was the leading online travel service in the United States. It provided air, car, and hotel booking, vacation package and cruise offerings, destination information, and mapping services. In the United States, Expedia competed with traditional travel distribution channels and online travel services such as Travelocity.com, Hotel Reservations Network, Priceline.com. The HomeAdvisor online real estate provided comprehensive tools for finding homes and loans on the Internet. HomeAdvisor provided users with the information and knowledge needed to take control of the home-buying process and competed with AOLs House and Home channel and Homestore. The CarPoint online automotive service was the leading online automotive marketplace, visited by more than 7 million consumers each month. With details on more than 10,000 car models and 100,000 used vehicles, users could research and compare cars of virtually every make and model, identify local dealers, and receive instructions for post-purchase service and maintenance. Microsoft also faced many competitors in the online automotive service space, including Autobytel, CarsDirect, AOL autos, and Yahoo! autos.

OTHER Other included Microsofts activities in the manufacture of PC input devices and the producing and publishing of training materials. Both activities started in 1998 and represented 2% of Microsoft total sales in 2001. Microsofts venture into the input hardware business was limited to devices such as mice, keyboards, and game controllers to use with PC games. In this area Microsoft faced substantial competition from computer manufacturers, since computers were typically sold with a keyboard and mouse, and other manufacturers of these devices. Through Microsoft Press, Microsoft offered comprehensive learning and training resources to help new, advanced, and professionals users get the most from Microsoft technology. Microsoft Press offered books, CDs, self-paced training kits, and videos. Microsoft Press competed in the retail book and e-Learning markets with publishers that also created content on Microsoft technologies. A few of the retail competitors were Pearson, WROX, Sybex, and Wiley.
3.- THE VIDE GAME INDUSTRY
Plus plus plus plus plus plus! that, is the video-game industry, according to Ken Kutaragi, President of Sony Computer Entertainment Inc. Indeed, the video game industry was growing fast - faster than many other entertainment industries (see Appendix 2).
3.1.- THE MARKET The total size of the video game market amounted to almost USD 20 billion in 2000 and it was expected to increase further in the years ahead. The industry consisted of three separate but interrelated segments: Console gaming, divided into stationary and handheld, and PC gaming, each with its own specific characteristics.
The console segment, which had always been dominated by a few players, was considered the mainstream of gaming. In the sub-segment of handheld consoles, one firm, Nintendo, almost had monopoly. A key feature of the console segment was the non-compatibility between the consoles of different manufacturers. Thus, software had to be designed specifically for the console in question and the software often had exclusive status. This affected the economics of the business (cf. below). The PC video game market was smaller than the console related market in USD terms, but the proprietary restrictions on software was less restrictive. Almost all PCs were operated by Microsofts Windows, which implied that developers had a fixed standard to develop games upon. It was relatively easy to start developing games for PCs, costs and prices were often much lower than for games run on consoles. As a result, the availability of PC titles was much higher than the availability of console games.10 Contrary to some opinions, the PC was not the cheapest form of playing games, not only because of its price but also because playing the latest games on a PC always required the latest technology, and with technology rapidly advancing every year, frequent PC upgrades could become very expensive. Furthermore, though consoles were not inter-machine compatible, the consoles were, at least initially, very specialized in order to keep prices at affordable levels and they were considered a very stable platform contrary to the PC which often had software bugs.

FIGURE SIZE OF VIDEO GAME MARKET (BILLION USD)

2 5.0.5.0.0 5.0 0

03 E 04 E E 2E 00 01
PC G am e Sa les Co ns ol e G am e Sa les Co ns ol es
The video game industry was highly cyclical, with a bottom to peak period of roughly five years. For the consoles, this was due to the fact that new consoles were launched about every five years. The last hardware cycle began in 1995 with the launch of the Sony PlayStation 1, and lasted through 1999. The current cycle began in 2000 with the Sony PlayStation 2 launch. The software market followed and was cyclical as well. Within each cycle, the first two years and the last year were characterized by slower game sales growth as consumers awaited new console platforms video game software sales usually peaked two years after the release of the new generation consoles. Following Sonys PS2 launch in October 2000, other console producers followed in late 2001: Nintendo's GameCube and Game Boy Advance and Microsofts XBox. With Microsofts entry in the video game business, some feared that the established industry cycle could be shortened, down to three years. The biggest threat to PlayStation 2 is that the XBox changes the industrys life cycle, explained Kunitake Ando, Sonys President and Chief officer.12 Non US sales of games and consoles accounted for about 52% of total revenues in 2000. Non US markets were expected to increase slightly faster than the US market accounting for 54% of total industry revenues in 2005. The US market and the Non-US markets were expected to show
In 1998, there were almost 5,000 PC titles available compared to about 400 for the main console, Playstation 1. Forecast developed by the authors, Instituto de Empresa, 2002. Based upon multiple interviews and research by staff, consulting NPD FunWorld, IDC, Jupiter Research, Forrester Research, and Bear Stearns. Sony chief says XBox threaten life cycle, Financial Times 14 November 2001.
roughly the same split between console revenue and game revenue over the cycle (cf. Appendix 3).
3.2.- VIDEO GAMES EVERY WHERE YOU GO While consoles were the dominant platform for playing games, video games were in fact everywhere. They could be found on airplanes, on the Internet, on mobile phone and Personal Digital Assistants (PDA). Video games were developed for each specific hardware platforms, whether it was a PC, a console, a mobile phone or a PDA. Consumer research13 from the US showed that nearly 60% of all console units were located in either family rooms or living rooms. The video game console was increasingly occupying a central place in the home entertainment complex. The same research found that 32% of Americans played games from time to time on handheld systems, that 5% played games on their PDA, and 11% played games on their mobile phones. One place where gaming was growing rapidly was the Internet. In late 2000, there were about 40 million Americans playing online games, and it was estimated that 72 million would play online games by 2004. 14 Over the current cycle (2000-2005), the online gaming market was expected to grow to more than $5.3 billion by 2005. The new consoles all featured facilities for Internetconnectivity. People increasingly connected to the Internet through high-speed connections. This meant that game designers would have more opportunities to deliver richer game experiences to online users. But games were not just limited to the living room, the desktop, or cyberspace, they were also emerging on wireless platforms. Mobile phones were becoming the most omnipresent communication appliance in the world. Half a billion phones were sold annually worldwide. Data Monitor forecasted that 198 million people in Western Europe and America would be playing games on their phones by 2004. Nokia estimated that mobile gaming would generate $6 billion revenue worldwide by 2005. Games were also becoming a popular application for PDAs. For instance games were already among the most popular downloads for Palm Pilots.

Big risks in video-game world, The Irish Times. http://scripts.ireland.com/technology/showall.cfm?ID=2224 PS2 is nice, but I love cars. Thursday October 25, 2001, The Guardian http://shopping.guardian.co.uk/games/story/0,1587,584190,00.html
FIGURE FIRST-HALF 2001 GAMING SOFTWARE DOLLAR MARKET SHARE BY PUBLISHER
Infogrames 7% Nintendo 14% Activision Sony 6% 5%
THQ 4% Sega 3% Take Two 3%

Electronic Arts 17%

EIDOS 2%

Other 39%

Third party publishers usually published games for more than one platform, if possibly, spreading their risk and leveraging franchises. Though publishers had to have strong marketing and distribution channels, the key was to have hit titles. These could often be developed further into sequels or re-deployed on other platforms. Once the game had been tested and copied onto millions of CDs or cartridges, publishers leveraged their relationships with retailers to find shelf space for their product or the developers product. Independent distributors had earlier undertaken this role, but these had now largely been integrated with the publishers. Finally, publishers promoted and marketed their product to the end consumer. Smaller publishers could minimize their risk through teaming up with other publishers, which had stronger capabilities in for example distribution. First-party publishers were typically the market share leaders for their own platform, as was the case for Nintendo and Sony. In 2000, however, Electronic Arts surpassed Sony in terms of North American market share as the top seller of PlayStation 1 games. Nintendo had always held a disproportionate share of the games for the handheld market, given its monopoly of the handheld video gaming segment with the Game Boy. However, this was changing as the company had recently widened its access to third party publishers. On the PC platform, Infogrames, Electronic Arts, Vivendi-Universal, and Microsoft held the leading market share.
THE RETAILERS Examples: Walmart, Toys R Us, Funcoland, Electronics Boutique Video games software and hardware products were sold through a number of different channels, such as mass merchandisers, toy stores or through gaming stores specialists. In 2000, ten U.S. retailers accounted for more than 75% of game sales. The largest retailers included Wall Mart, Toys R Us, Electronics Boutique, Target, Best Buy, CompUSA and Computer City. The ongoing battles within the retail channel for store shelf space and consumer mind-share, made it more and more difficult for independent publishers to gain access to adequate shelf space.

PD 2001.

The Internet had also become a new channel of distribution with publishers selling directly to consumers. But, the Internet was still viewed as a way to reach customers who would not otherwise be able to find a title, rather than a conflicting channel. Consumers often wanted to see the game packaging before buying, especially during the busy holiday season. Video game renting was another channel to get video games into the homes. Although console manufacturers and game developers had initially feared that the emergence of this channel would reduce game sales, it appeared that games were usually bought after they had been tried, either at a friends house or through renting.
4.- VIDEO GAMES Software is king,' said Kazuo Hirai, president of Sony Computer Entertainment of America. You can have the best technology, the most advanced box in the world. But without the applications, that box will only collect dust on the retail shelves.21 Indeed, video games were not just the heart of the video game industry anymore, they were also its emotional center. 25 years of evolution (see Appendix 5) had transformed video games into more than just an interactive form of entertainment. There is a young audience who treat video gaming as part of their life, said, Ed Fries, head of Microsoft's games division. It is part of their entertainment diet - TV, music, video games. It is all mixed together for a 16-year-old. There is a huge segment of the population that just hasn't been exposed to interactive entertainment. It doesn't understand how powerful it is, how great it is not just to be told the story but to be the one in the story.
4.1.- GAMES WERE NOT KIDS STUFF ANYMORE Daddy wants to play too! The stereotypical image of the teenage boy playing alone for endless hours was slowly giving place to the image of the stressed executive playing strategy games in his three-piece suit. According to a 2000 survey22 of the US market, 32% of Americans who played computer and video games were aged 35 or older with a remarkable 13% aged above 50 (see Figures 4 and 5).
FIGURE MOST FREQUENT COMPUTER GAME PLAYER IN THE US, 2000

28% 42%

Under 18 Years Old Between 18 and 35 Years Old Over 35 Years Old
Video games as big as movies, By P.J. Huffstutter, 1999, http://www.augustachronicle.com/stories/051799/tec_games1.shtml Survey conducted by Peter D. Hart Research Associates, 2000. IDSA's Annual Consumer Survey, 2000.

6.- THE BIGGER GAME

In his talk in November 2001, Steve Balmer hinted that the XBox could be part of a bigger play. On the other hand, you could say is it the end of the road or is there a bigger play. And the answer is yeah theres a bigger play we hope to get over time. And we come
at the thing, we say, We know that one of the major uses of that box next to the television set is its going to be a great gaming platform.30 For many the XBox was only the beginning of something bigger. For several months, there had been rumors about Microsoft actively working on a multifunction consumer appliance called the HomeStation. It was said that the HomeStation would be based on the XBox design. Besides playing XBox games, the HomeStation would also act as a digital video recorder, similar to devices from TiVo (TiVo Digital Video Recorder are like VCRs, but with a hard disk and without the hassles of videotapes) and Sonicblue's ReplayTV. They would also perform Internet functions such as email and Web surfing, and play DVD movies and digital music tracks. The HomeStation would hook into Microsoft's.Net online strategy by serving as a conduit for services such as streaming media and online shopping. Most of those functions could be handled by the current XBox with minimal retrofitting. For some the idea made sense. Look what the XBox has got on it, it has a hard drive, so why doesn't it become a TiVo? Why doesn't it become a computer? Why doesn't it become a home entertainment controller? It can become all of that.31 But others had different opinions: Microsoft is not going to make any major revisions to the XBox for the next 12 to 18 months, as far as a bigger hard drive or more memory. They are not going to put out an entirely new product in the next few years - it just doesn't make sense. Beyond that point, there may be all sorts of things bubbling under the organization.32 The HomeStation would fit into Microsofts earlier plans to turn the PC into a digital entertainment jukebox for the home. Microsoft's Mira technology, for example, would allow display manufacturers to produce wireless, portable screens that can access information and media stored on the PC from anywhere in the home. Meanwhile, Microsoft's Freestyle will expand the Windows XP operating system with functions for recording video, playing DVDs and other entertainment tasks. Microsoft was not the only one thinking of expanding the functionality of its game console. In 2001, Sony had already announced hardware add-ons and content partnerships that would allow the PlayStation 2 to handle online tasks such as e-mail and streaming media. A concept such as HomeStation could give Microsoft a big competitive advantage in the video game market, an advantage that the other console manufacturers would find difficult to match given that the technical specificity of their console was not easily transferable for use in other applications. But right now the clock was ticking. The Xbox had been launched, and the Christmas season, only a few weeks ahead, will be the console first real market test. Many couldnt help but to wonder whether Microsofts decision to diversify in the video game console new industry will bear its fruits. The industry knew that Microsofts entry will have major repercussions. But, was the video game console industry so attractive after all? Did Microsoft have what it take to be competitive in this cutthroat industry? There were many other important questions of course, but the game had begun, and it was now time to play it.

STEVE BALLMER talk 29 November 2001, Credit Suisse First Boston Technology Conference, Phoenix, Arizona, November. Bob Sutherland, Technology Business Research. Matt Rosoff, Directions on Microsoft.
APPENDIX 1 MICROSOFT FINANCIAL RESULTS.
MICROSOFT CORPORATION, INCOME STATEMENT (IN $ MILLION)33
At June 30 Revenue Operating expenses: Cost of revenue Research and development Acquired in-process technology Sales and marketing General and administrative Other expenses Total operating expenses Operating income Losses on equity investments and other Investment income Non-continuing items Income before income taxes Provision for income taxes Net income before accounting change Cumulative effect of accounting change Net Income Source: Microsoft Annual Reports. 2,195 3,454 4,490 7,785 9,0 3,379 1,184 2,0 5,314 1,860 3,454 2,19 5,991 3,059 2,259 7,065 4,871 2,145 1,326 2,170 1,863 2,460 2,2,0 8,677 6,585 (207) 7,117 2,627 4,490 2,814 2,3,0 9,737 10,010 (70) 1,11,891 4,106 7,785 3,002 3,4,126 1,11,950 11,006 (57) 3,14,275 4,854 9,421 3,455 4,4,0 13,576 11,720 (159) (36) 0 11,525 3,804 7,721 (375) 7,9,11,15,19,22,25,296
MICROSOFT CORPORATION, PROFIT AND LOSS AS PERCENTAGE OF SALES.
AT JUNE 30 Revenue Operating expenses: Cost of revenue Research and development In-process R&D Sales and marketing General and administrative Other expenses Total operating expenses Operating income Losses on equity investments and other Investment income Non-continuing items Income before income taxes Provision for income taxes Net income Source: Microsoft Annual Reports. 3.37.3 13.1 24.3 3.44.5 15.6 28.9 23.7 14.24.1 3.5 0.2 66.2 33.8 18.2 15.20.2 3.0 2.2 59.2 40.8 16.1 17.0 1.9 18.9 2.56.9 43.1 -1.4 4.46.6 17.2 29.4 14.3 15.16.4 3.49.3 50.7 -0.4 9.60.2 20.8 39.4 13.1 16.18.0 4.52.1 47.9 -0.2 14.62.2 21.1 41.0 13.1 16.18.0 4.52.1 47.9 -0.2 14.62.2 21.1 41.100
All figures are as of June 30 , which is the end of Microsofts fiscal year.

APPENDIX 1 (CONTINUACIN)

MICROSOFT FINANCIAL RESULTS. MICROSOFT REVENUES PER REGION (IN $ MILLION)
At June 30 South Pacific and Americas Europe, Middle East, and Africa Asia FG Total OEM (Original Equipment Manufacturer) Total Source: Microsoft Annual Reports. 6,547 2,503 9,1997 4,387 2,773 1,289 8,449 3,487 11,5,569 3,497 1,477 10,543 4,719 15,7,249 4,327 1,776 13,352 6,395 19,8,327 5,020 2,597 15,944 7,012 22,9,515 4,864 3,058 17,437 7,859 25,296
MICROSOFT REVENUES PER BUSINESS DIVISION (IN $ MILLION)
At June 30 Desktop & Enterprise Software & Services Desktop Applications Desktop Platforms Desktop Software Enterprise Software & Services TOTAL DESKTOP & ENTERPRISE SOFTWARE & SERVICES Consumer Software, Services, & Devices Consumer Commerce Investments Other Total revenue Source: Microsoft Annual Reports. 9,050 11,936 6,393 4,798 11,191 2,446 13,15,262 7,775 6,737 14,512 3,334 17,846 1,652 19,747 9,296 7,018 16,314 4,081 20,395 1,753 22,956 9,543 8,041 17,584 4,829 22,413 1,630 25,2001

Adapted from the State of the Industry Report 2000-2001, Interactive Digital Software Association.
APPENDIX THE MAJOR REASONS WHY GAME PLAYERS LIKE TO PLAY GAMES
They are challenging They relieve stress The provide a lot of entertainment value for the money They are social activity people can enjoy with their friends 78.4% 55.1% 48.9% 37.4%
APPENDIX 7 SONY CORPORATION FINANCIAL RESULTS.
SONY INCOME STATEMENT (IN MILLION)
March 31 Operating income (loss) Income (loss) before income taxes Net income (loss) R&D expenses Exchange rate average (yen per dollar) Current 2000-March 31 2001.
2001 7,314,824 225,346 265,868 16,754 416,124
2000 6,686,661 223,204 264,310 121,835 394,106
1999 6,804,182 348,212 *377,691 *179,004 375,120
1998 6,761,004 525,724 459,263 222,068 318,132
1997 5,663,134 370,330 312,429 139,460 282,124
Total Sales and Operating Revenue
Sony annual reports. Note: Statements are for accounting years ending March 31. Thus FY 2001 is for the period April 1
SONY BALANCE SHEET (IN MILLION)
ASSETS Current assets: Cash and time deposits Marketable securities Total current assets Total assets 613,154 90,094 3,477,474 7,827,966 632,202 107,499 3,022,016 6,807,197 616,514 117,857 3,069,393 6,299,053 530,425 169,209 3,267,477 6,403,1998
LIABILITIES/STOCKHOLDERS' EQUITY Total current liabilities Total long-term liabilities Stockholders equity Total liabilities and Stockholders equity *Restated 2,646,740 2,846,736 2,315,453 7,827,966 2,160,342 2,429,384 2,182,906 6,807,197 1,942,545 2,396,716 1,823,665 6,299,053 2,116,325 2,345,377 1,815,555 6,403,043

APPENDIX 7

NPD Interactive Entertainment Software Services.
SONYS REVENUE PER BUSINESS-SEGMENT (MILLION USD AND )

March 31

Sales and operating revenue Electronics Game Music Pictures Financial Services Other Elimination Consolidated 5,473,394 660,916 612,113 555,227 478,824 156,398 (622,048) 7,314,824 4,671,002 654,736 706,684 494,726 438,762 141,562 (421,011) 6,686,661 4,669,702 783,822 758,691 545,752 339,369 291,636 (584,790) 6,804,182 4,692,848 722,551 692,688 644,633 291,068 251,562 (534,346) 6,761,004
Operating income (loss) Electronics Game Music Pictures Financial Services Other Corporate Consolidated and 225,346 223,204 247,083 (51,118) 20,502 4,315 17,432 (9,374) 98,573 76,935 28,293 35,920 23,309 (9,648) 131,106 136,500 36,566 42,954 18,048 (4,538) (12,424) 348,212 317,276 116,936 52,058 37,013 20,326 (6,959) (10,926) 525,724
Operating income / Total sales (%) Electronics Game Music Pictures Financial Services Other Consolidated the game-business. 5% -8% 3% 1% 4% -6% 3% 2% 12% 4% 7% 5% -7% 3% 5% 8% 3% 17% 5% 8% 5% 7% 16% 8% 6% 7%
Adapted from Sony Annual Reports. Note that USD 3,890 million of the sales of Electronics above are transactions with
SONYS SALES BY GEOGRAPHIC SEGMENT (%)

March 31 Japan United States Europe Other areas Total Sony annual reports
2001 32.8% 29.8% 20.2% 17.2% 100%
2000 31.7% 30.3% 22.0% 16.0% 100%
APPENDIX 8 NINTENDO FINANCIAL RESULTS.
NINTENDO INCOME STATEMENT (IN MILLION)
2001 Net sales Total revenues Cost of sales Total cost and expenses Income before income taxes and equity earning Net income Nintendo annual reports 462,196 567,665 278,090 399,013 168,652 96,530,340 557,018 289,638 453,944 103,074 56,572,440 598,417 310,835 436,197 162,220 85,534,325 567,198 296,791 393,447 173,751 85,417,593 462,923 267,864 347,432 115,491 65,482
NINTENDO BALANCE SHEET (IN MILLION)
2001 ASSETS Current Assets Cash and cash equivalents Short-term investments Total current assets Total Assets LIABILITIES/STOCKHOLDERS EQUITY Current liabilities Long-term liabilities Shareholders equity Total Liabilities and Shareholders equity Adapted from Nintendos annual reports. 224,753 6,016 834,952 1,068,568 169,215 3,426 757,448 933,374 188,929 4,153 700,292 893,374 211,361 1,731 633,083 848,607 169,553 2,349 563,718 733,271 785,992 52,033 958,246 1.068,568 594,062 78,047 809,826 933,374 638,582 52,666 809,307 893,374 605,353 30,580 777,138 848,607 541,660,276 735,1997
APPENDIX 9 ELECTRONIC ARTS FINANCIAL RESULTS
ELECTRONIC ARTS INCOME STATEMENT (IN $ THOUSAND)
EA Core (excl. EA.com) 2001 Total net revenues Total cost of goods sold Gross profit Total operating expenses Operating income/loss Net income/loss 1,282,830 640,239 642,591 519,176 123,415 11,1,401,107 700,024 701,083 492,696 208,387 171,1,205,674 624,252 581,422 467,264 114,158 81,752
ELECTRONIC ARTS GEOGRAPHIC REVENUE MIX (IN $ THOUSAND)
2001 North America International Europe Japan Asia Pacific Total Revenues Electronic Arts annual reports 831,924 490,349 386,728 52,582 51,039 1,322,846,637 573,374 486,816 33,371 53,187 1,420,704,998 516,865 436,772 33,368 46,725 1,221,863
ELECTRONICS PLATFORM REVENUE MIX (IN $ THOUSAND)
2001 PC Play Station Play Station 2 N64 Online Subscriptions License, OEM and Other Advertising Sub-Total Affiliated Label: Total Revenues Annual Report, SEC form 10-K, June 2001 408,454 309,988 258,988 67,044 28,878 20,468 6,175 1,099,995 222,278 1,322,397,777 586,821 120,415 16,771 22,894 1,144,678 275,333 1,420,270,793 519,830 152,349 12,570 18,216 973,758 248,105 1,221,863