Microsoft is at a crucial point in its expanding efforts in the consumer arena. Company Chairman and Chief Software Architect Bill Gates used his keynote address at the International Consumer Electronics Show (CES) to unveil the Windows Home Server and announce that major service providers like AT&T would offer the Xbox 360 as a set-top box alternative. These announcements follow the launch of the Zune MP3 player and come right before the late January release of the retail version of Vista.

A few hours before his keynote speech, Gates took time to discuss the evolution of what the company calls connected entertainment. He also talked about the future of product distribution over the Web, how far Microsoft will go in hardware, and -- as he enters his last 18 months at Microsoft full time -- lessons he's learned as a technology visionary.

You've been working on IPTV (Internet Protocol Television) for some time now and with the announcement that service providers will be offering the Xbox essentially as a set-top box alternative, it seems things are coming together. Can you talk about how this came about -- what happened on the technical side and what happened on the business side to make this deal come to fruition?

Obviously the success of the 360 -- in terms of getting the very best games that use high definition and getting people online so they could find their friends, do contests, be spectators -- that's become a key part of advanced gaming. In parallel with the Xbox 360 being developed, people like AT&T and others bet their company on having a state-of-the-art video offering and we became the partner to provide the software platform for that. And so they spent 2006 getting it put together.

Now in the next two years they're really gonna drive the numbers in a very big way. The idea of having as one of their offerings the ability to connect up to Xbox we think will be very attractive. In some ways you can think of this as a convergence device; it lets you project any PC in the home through the extender up into the living room. It lets you download high definition videos. It lets you play video games and now with IPTV it gives you the state-of-the-art TV viewing experience.

So all those things you want in the living room really don't require five remote controls and different user interfaces. Obviously as we drive the price down because of the incredible volumes there, that will allow this, as a set-top box, to not be a super premium price and yet have way more capabilities than the term set-top box has ever called to mind.

You used the term convergence. How does the Home Server fit into your vision of the connected entertainment home? Is there a scenario where a home might have a Home Server, an Xbox, a Media Center PC and a Zune? How do they work together?

Whenever you have multiple devices including multiple PCs that you want to share information with it's always been a bit complicated. Do you leave those PCs on and do connections PC-to-PC? We need something that you just plug in, is very simple and not only allows access within the home but remotely, and so that's what we've been working on. We've got some good partners. HP is a lead partner on this. We've made it awfully simple and we think in a multiple PC household this could be quite popular.