Microsoft 2003 Annual Report Download - page 17

MSFT 2003 FORM 10-K
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Part I, Item 1
service is one the customer can depend on to fulfill its functions. Business Integrity involves being responsive to customers, addressing problems effectively with
products or services, and being transparent and responsive in customer interactions.
To serve the needs of users around the world, we “localize” many of our products to reflect local languages and conventions and to improve the quality and
usability of the product in international markets. Localizing a product may require modifying the user interface, altering dialog boxes, and translating text.
MANUFACTURING
We contract out most of our manufacturing activities to third parties. Outside manufacturers produce the Xbox, various retail software packaged products, and
hardware. Our products may include some components that are available from only one or from limited sources. Key components that are currently obtained from
a single source include the Xbox central processing unit (CPU) from Intel Corporation and the Xbox graphics processing unit (GPU) from NVIDIA Corporation. With
the exception of the Xbox CPU and GPU, we generally have the ability to use other custom manufacturers if the current manufacturing vendor becomes
unavailable. We generally have multiple sources for raw materials, supplies, and components and are often able to acquire component parts and materials on a
volume discount basis.
OPERATIONS
We have regional operations centers in Ireland, Singapore, and the greater Seattle area. The centers support all operations in their regions, including information
processing and vendor management and logistics. The regional center in Dublin, Ireland supports the Europe, Middle East, and Africa region, the center in
Singapore supports the Japan and Asia-Pacific region, and the center in the greater Seattle area supports North and South America. Microsoft Licensing, Inc., a
wholly-owned subsidiary in Reno, Nevada, manages our original equipment manufacturer (OEM) and certain organizational licensing operations.
DISTRIBUTION, SALES AND MARKETING
We distribute our products primarily through the following channels: OEM; distributors and resellers; and online services and products. Our three major geographic
sales and marketing organizations are the Americas Region; the Europe, Middle East, and Africa Region; and the Japan and Asia-Pacific Region.
OEM
Microsoft operating systems are licensed primarily to OEMs under agreements that grant the OEMs the right to distribute copies of our products with their
computing devices, principally PCs. We also market and license certain server operating systems, desktop applications, hardware devices, and consumer software
products to OEMs under similar arrangements. We have OEM agreements covering one or more of our products with virtually all of the major PC OEMs, including
Acer, Actebis, Dell, eMachines, Fujitsu, Fujitsu Gateway, HP, IBM, NEC, Samsung, Siemens Computers, Sony, and Toshiba. A substantial amount of OEM
business is also conducted with system builders, which are low-volume customized PC vendors.
Distributors and Resellers
We distribute our finished goods products primarily through independent non-exclusive distributors, authorized replicators, resellers and retail outlets.
Organizations license our products primarily through Large Account Resellers (LARs), Direct Market Resellers (DMRs), and value added resellers. Many
organizations that license products through Enterprise Agreements (EAs) now transact directly with us with sales support from our Enterprise Software Advisor
channel partners. These Enterprise Software Advisors are also typically authorized as LARs and operate as resellers for our other licensing programs. Although all
of our types of reselling partners reach organizations of all sizes, LARs are primarily engaged with large organizations and value added resellers typically reach the
breadth of small and medium sized organizations. Some of our distributors include Ingram Micro and Tech Data, and some of our largest resellers include
Software Spectrum, Software House International, Dell, CDW, and Insight Enterprises. Individual consumers obtain our products primarily through retail outlets
including Best Buy, Wal-Mart, and Target. We have a network of field sales representatives and field support personnel who solicit orders from distributors and
resellers and provide product training and sales support.
We license software to organizations under arrangements that allow the end-user customer to acquire multiple licenses of product. These arrangements are
designed to provide organizations with a means of acquiring multiple licenses, without having to acquire separate packaged product through retail channels. In
delivering organizational licensing arrangements to the market, we use different programs designed to provide flexibility for organizations of various sizes. While
these programs may differ in various parts of the world, generally they are as follows:
Open. Targeted at small to medium organizations, this program allows customers to acquire perpetual licenses and, at the customer’s election, rights to
future versions of software products, over a specified time period (generally two years). The offering that conveys rights to future versions of software product
is called Software Assurance. Software Assurance also provides support, tools, and training to help customers deploy and use software efficiently. Under the
Open program, customers can acquire licenses only or licenses with Software Assurance. They can also renew Software Assurance upon the expiration of
existing volume licensing agreements.
Select. Targeted at medium to large organizations, this program allows customers to acquire perpetual licenses and, at the customer’s election, Software
Assurance, which consists of rights to future versions of software products, support, tools, and training, over a specified time period (generally three years).
Similar to the Open program, customers can acquire licenses only, acquire licenses with Software Assurance, or renew Software Assurance upon the
expiration of existing volume licensing agreements.
Enterprise Agreement. The Enterprise Agreement is targeted at large organizations that want to acquire perpetual licenses to software products for their
entire enterprise along with rights to future versions of software products over a three year period.