Bill Gates is coming to your living room, whether you like it or not.

Microsoft's chairman is setting the company on a course to provide software and tools that will allow different forms of entertainment to blend. Messaging will become a crucial part of Xenon, the code name for the next Xbox. Games will also try to reach a broader audience. In addition, Microsoft will work with television outlets like the Discovery Channel and MTV Networks to create tools for delivering content, as well as advertising, into the home.

At the same time, Microsoft will continue to raise the stakes against Apple in the music industry and Google and Yahoo in search.

Meanwhile, Microsoft Research is working on ways to lower the cost of getting people in emerging nations hooked on the Internet. One idea: mesh networks that will let several families share connections.

Gates spoke with CNET on the eve of his keynote speech at the Consumer Electronics Show in Las Vegas about Microsoft's consumer plans, the convergence of entertainment technologies, and why he hasn't done a blog yet.

Q: The industry's been talking about convergence for years. The first products have come out, so what's next? Interoperability, is that the next challenge?
A: Well, there's a lot of that going on. For us the key convergence product is the Media Center PC, which is the idea of that single remote control giving you the best TV experience, music, photos, but also the full power of the PC and we've got lots of partners who keep signing on to Media Center and doing neat things. We'll show some Discovery Channel stuff in the keynote. We have a new relationship with MTV where they're using our rights management and formats and we're connecting it to the Media Center.

And so there is growing momentum with partners, growing momentum with the hardware. The price of Media Center PCs came down a lot, which is partly why we were able to double our sales this holiday. We've got some new remote controls from Phillips and others.

And so you fill out the ecosystem, you get the people who install these systems to understand how they do the customization, you get the word of mouth going and so I'd say we feel great about where sort of the centerpiece convergence device is and the peripheral things happening around it.

How are the different entertainment and media industries going to be affected by these changes. For instance, it seems like advertisers are really impacted.
Well, there's a thing that we can do for the advertisers that is critical for them, which is to allow the advertising to be targeted. And so you've seen with our IP TV effort, people like SBC signing up for that, we've got Bell South as a new announcement of a partner there. With that infrastructure, even for people watching the same show, you can insert just in a perfect way an ad targeted to that individual.

And the value of targeted advertising is really twofold. First, it means the person is less likely to want to skip the ad and second of all, the chance that they'll actually do something, buy something is dramatically improved as well.

And so the new TV infrastructure will be about very targeted advertising. Advertising is taking on new forms. Obviously in the search space we're doing neat things with advertisers. No doubt it's not going to stay the same as it is today.

What changes does this mean for Microsoft? Do you see yourself becoming, let's say, more of a seller of content?
Well, the most explosive piece of content this holiday season was Halo 2. We sold 6.3 million copies, we've had 69 million hours of online game play. And so is Microsoft a content company? Well, I'd say, you know, Master Commander is good, people have talked about how the story made them cry; that's content but it's also software.

The boundary there has always been a bit of a gray boundary. Our main role is to provide the platforms and the tools and simply partner with the content people like MTV and let them do what they're good at. It's mainly in this interactive realm that we need to come in and do some complete content ourselves.

Will there be much of a push at Microsoft will to sell third party content like muskc, or is it always going to be a smaller part of you?
Well, I don't think -- you know, we've said that having the music platform there is just part of the overall online relationship that we want to have with these customers. In and of itself, it's not going to be a big source of a profit because there will be lots of people with stores out there, but then in terms of making it simple, having it work on all the devices, work with all the stores, that is important to us. The Windows ecosystem is the ecosystem that provides variety.

Apple is doing things the way Apple does where it's the Apple hardware and the Apple store, that's great for them; we're doing it the Windows way where you've got things like this Creative Zen Micro that sold out this holiday season. This brings the photo capability in and it's a very attractively priced device. So the variety story is an important one for us, it uses our rights management format, it supports a subscription approach that we think can be a significant part of online music sales.

What do you think of Apple's success so far? I mean, they clearly have had a hit with the iPod.
Absolutely. They had a hit with the Apple II, they had a hit with the Macintosh and they have a hit with the iPod, so this is a company that's had three hits and that's very impressive. There are a lot of companies that don't have three hits. And in the same way that Macintosh helped get people exposed to graphical user interface, the iPod is doing a great job getting people to think about digital music. In the long run there will be a lot of people making digital music players and we think there will be a very different market share with dozens and dozens of companies and other than Apple, all those player makers are signing up to work inside the Windows PlaysForSure ecosystem.

There's a big debate over whether games will surpass movies and TV as a bigger portion of revenue in the entertainment industry. What do you think will happen?
Well, there are a couple things to look at. Instant messaging will go from just being a text thing to also being voice and video and music, so instant messaging, particularly for young people but in general is very, very explosive.
And Xbox Live is really talking to your friends, doing things with your friends. And as we bring in new gaming titles that are more approachable, appeal to different demographics, the boundary between what's gaming, what's socialization and what's communication, you will have really broken down the barriers there.

We can make these hot, super great graphics games something that are easy for people to use. That's a big initiative we have as we move to the next generation of Xbox. Likewise, the connection between the Xbox Live and our Messenger work, our communications on the PC, making that really simple so people can say, "Hey, come and play," "Oh, okay, I'm finishing my homework, I'm almost done, I'll get on and play with you." And so even as they're connected up to each other they don't think of, "Oh no, now I'm gaming, now I'm communicating."

What are some of the primary goals with Xbox 2?
Broadening the market, having media capabilities that when there's a PC we connect up to that. This whole story of the Windows Media Connect and how all the formats and rights management and that simple Media Center menu that's just got TV, photos, music right there, those are common elements we're bringing to all the home devices.

We didn't do Xbox just to do a video game, we did it to be part of our vision of the digital lifestyle, and with the next generation, we really get to go there. In the first generation we had one simple goal, which was to establish credibility as a great videogame platform. We've done that. Actually the last few months in the U.S. we outsold Sony with the PlayStation. So even though they have the biggest installed base, we are a very strong, credible number two in that. As we go into this next generation, it's much broader.

Yes, great videogaming but videogaming for a broader set of people, more communications, more media, more connectivity at the same time we move up to things like high definition graphics and wireless that the chip breakthroughs allow us to get there. So just the games alone you'd go wow, but the concept now of bringing in your music, your media, connecting to the PC, connecting Xbox Live to Messenger, that just makes it a very big deal that --

It's a full entertainment center basically.
That's right. So Media Center PC and Xbox become totally complementary. You've seen a bit of that where we let you take music from PCs and put it into game titles and we have this extender concept where the Media Center can project through the Xbox, but that's just the start of what we can do there.

One thing that's kind of intriguing in Xbox 2 is you're participating a little more on the design of the silicon.
That's right.

Is it to improve performance or--
Well, we have some key partners that we've announced. ATI and IBM are the key chip partners and there are some others. But I'd say our sophistication is much higher in this second generation. So every level, what we're doing in tools, what we're doing in Live, the way we're working with the publishers, the way that we've gotten involved in the hardware design, at some point this work, we're being very coy about when and all that but I'm certainly excited when it comes time to show at how much smarter we are getting to do it a second time with the team that's been built there.

Any interest in handhelds?
We are not in the handheld space. We watch the intense competition of Sony, Nintendo, Nokia, whoever comes along with interest. Our portable gaming will be focused on things like getting onto the phones, getting onto portable PCs but our Xbox team is focused on the console, the TV-connected console. And the fact that Sony's a little distracted with that may let us do all the better in the next generation.

One of the big phenomena of the year has been blogging. Has the growth surprised you?
Well, actually I think the biggest blogging statistic I know, which really blew me away, is that when we just went into the data, the Spaces capability that's connected up to Messenger that now we've got close to a million people setting up blogs.

Now, blogs, you always have to be careful. The decay rate of I started and I stopped or I started and nobody visited is fairly high, but as RSS has gotten more sophisticated and value-added search capabilities have come along, this thing is really maturing.

And we've done some things in Japan and Korea that are unique blog experiments. The Spaces things is a worldwide effort. It's a great phenomena and it's sort of built on e-mail and so we need to integrate more blogging capability into the e-mail world and as we do the next generation of Outlook you'll see that. We need to integrate it more into our SharePoint, which is our collaboration Office platform, and then, as I discussed, MSN is embracing it so that instead of thinking about, okay, I go to one community to do photos, one community to do social networking, one community to do this, we say, hey, off of Messenger, which has got your buddy list already, then let's let you do the photos and the social networking and everything but started in an integrated way off of messenger.

Which ones do you read, if any?
Well, it's interesting, I get a lot of people -- and this is very typical for me -- I get people who are forwarding things on to me, so I sort of have human search engines that will say, hey, there's a particular thing that's hot and that's interesting.

I just type in various keywords. We have a lot of blogs that are just internal to Microsoft where people are completely open about, hey, what's going on with this, what's going on with that.

I've toyed with doing one myself but I don't want to be one of those people who start and then don't finish it, and again I'm thinking maybe I could do one a month or one every six weeks, something like that. I'd kind of like to but I've got to be sure I can keep going for at least a year to make it worth doing.

Firefox and Linux browsers seems to be growing--
Well, it's not a Linux browser, it's just a browser.

Correct, but other browsers are making market share gains. When does this become a problem or an issue for you guys?
Well, people get confused about browsers. You can have as many browsers as you want on your PC, just like you can have tons of music players and things like that. In the world a few years ago people tended to have multiple browsers on their machine. AOL had a unique browser, actually MSN took the IE browser and did some unique things with it. Then IE was so relatively strong compared to everything, it achieved some greater than 90 percent type share.

So when people say Firefox is being downloaded onto people's systems, that's true, but IE is also on those systems. Firefox is new, people are trying it out. There's a certain percentage of people who do that, it's very easy to download.

We need to keep IE the best. We need to innovate in IE, do more add-ons, do improvements. We have some very exciting plans there. Some percentage of users are going to try Firefox and IE side by side, use the one that's best.

So no big problem, it's not people have stopped using IE, it's just we've got lots of good ideas that can match and move ahead.

In terms of our agility to do things on the browser, people who underestimated us there in the past lived to regret that.

But some people have left because of security issues.
Well, no one invests more in security of their browser than what we do on IE. The key message we have for people is they should turn on auto update because if you turn on auto update, without you having to think about it and go through a bunch of user interface or know about this or that or the other thing, you can know that there are hundreds of very smart people who are constantly improving your browser and making sure that you're safe. And so with auto update and IE you're getting the top security team and the quickest response team that there is anywhere.

Now onto the Google question. Why do you want to compete or does Microsoft want to compete against them? If you look at MSN last quarter, their operating income was 77 million. It's more than I make, but it's a minor portion of what Microsoft's overall income is. Does Microsoft want to build up MSN to be a general search engine?
Absolutely. We've been in the search business even before Google was around. The commitment we made is to build unique search technology across the board. And if you look at the Microsoft Research things that we've had breakthroughs in, natural language, document analysis, personalization, image analysis, language translation, our research agenda will allow us to take today's search from ourselves and Google and make what we have today look like a joke. And a lot of that will be built into applications like built into Office, built into the Windows shell. I see our desktop search offering, I think every review I've seen has rated it far better than what Google is coming out with.

When you get to Longhorn it will even have deeper integration and we'll have the same index format. So anybody who wants a smooth transition to Longhorn where you don't have dual indexers and everything, the commitment we're making at our desktop search is that same indexing, same format and we'll make that very smooth for people.

So we want to compete on the desktop because that's a key innovation area for Windows, we want to compete in the cloud because we think the competition between ourselves and Google and Yahoo will improve things.

If we thought somebody was doing the best possible job that could ever be done in search and there wasn't some big revenue out there, maybe we wouldn't do it, but quite to the contrary, whether it's understanding maps or virtual worlds or document analysis, today's search is nothing and we've got the software technology that will drive it to those new levels, as well as being a very significant business.

It sounds like the next step in search might be audio and video. Is that--
Oh, sure, everybody is working on those things, but just take the idea of finding your local pizza place and doing that right; search doesn't do that well today. Search is really crummy today; it's just that it used to be really crummy and now it's better and there never was anything like this before. So most of the results people get back to day are irrelevant results, so it's not just in the new media in sort of search as we know it today. Deep analysis can take us much further and that's why we're investing a lot and you'll see us more very rapidly.

I'm wondering too as you look forward 10, 20 years from now, what are the big problems that technology industry really needs to focus on?
Well, the technology business provides tools of empowerment, tools to let people be creative, to communicate, and there's no end in sight and certainly a decade's worth of work to make the ease of use and the power of these tools better. If you just think about meetings and the ability to record the video and the audio of the meeting, create a transcript, notify people, have them see the parts that they care about, it's crummy today and that's solvable.

When people want to manage a project with many companies involved, keeping data confidential, tracking and knowing what's going on, that's very crummy today compared to what it can be.

We with our Office franchise are committed to making workers far, far more productive than they are today. And believe me, we're not running out of ideas. The phone is inefficient today with phone tag, busy signals. E-mail is inefficient today with seeing stuff that's less relevant and how you organize it, bringing in the blog type capabilities is very important there. Plenty of room to do dramatic horizontal innovation that will drive productivity in every sector of the economy. Whether it's scientific discovery, healthcare, engineering, marketing, sales, you name it, the tools around Windows and Office are not even half of what they will be.

If you take that and map that into the home, that's where you get the idea of movies, music, games. There again we're not even half way to what we can deliver in that digital lifestyle.

This year there is a big push to make cheap computers for emerging markets. How is that going to have to evolve? A $300 computer is still going to be too expensive for many probably in Russia, India and things like that.
Well, that's not really true. The expensive thing is the connectivity. Getting Internet connectivity is expensive. If all they had to do was pay for the computer $300 and the communications was free, then we'd see PC usage would be very, very big. Ironically, communications costs tend to be highest in developing countries. So you need to do shared PCs through cafes or community centers. We're doing a lot of so-called mesh networking research that could use wireless spectrum to try and bring those connectivity costs way, way down and that's where you really see widespread computing breakthroughs.

The hardest thing by far is communications, then the hardware costs. We can make sure the software cost is never really holding things back, that it's a small enough percentage. In educational things we do a lot of software giveaways. We've been very generous to make sure that people when they first come into computing that software doesn't hold them back.

That's interesting the mesh because that way people can actually share a connection (off mike).
Yeah, the hard thing is the back haul of the Internet out of the village. Within the village, sure, you can mesh that up but if people are going to be streaming video you need quite a bit of capacity there. So it's not a simple problem to solve; we've got actually multiple research locations at Microsoft working together on this mesh thing and we've had a lot of conferences working with third parties, so we're optimistic that that's the thing that can solve the thing that holds back developing world computing.

In recent years there's been a lot of people clamoring to reform and restrict intellectual property rights. It started out with just a few people but now there are a bunch of advocates talking about we've got to look at patents, we've got to look at copyrights. What's driving this and do you think intellectual property laws need to be reformed?
No, I'd say of the world's economies there's more that believe in intellectual property today than ever. There are less communists in the world today than there were. There are some new modern day sort of communists who want to get rid of the incentive for musicians and moviemakers and software makers under various guises. They don't think those incentives should exist.

And this debate will always be there. I'd be the first to day that the patent system can always be tuned, including the U.S. patent system. There are some goals to cap some reform elements. But the idea that the U.S. has led in creating companies, creating jobs, because we've had the best intellectual property system, there's no doubt about that in my mind, and when people (like Europe ?) talk about they want to be the most competitive economy, the first thing you've got to fix, you've got to have the incentive system and intellectual property is the incentive system for the products of the future.