In writing my book, Business @ the Speed of Thought, I had to come up with a couple of words that would capture the idea that the Internet is a fundamentally different way of dealing with information. For people at home, I use the term "Web lifestyle." People who live the Web lifestyle take the Internet for granted, use it many times a day for news and sports, and make major purchases. They go to the Web to find out what the reviews say, what their friends think, to explore the different options there. Defined in a strict fashion, fewer than 5% of the people in the U.S. live this way today. But the Web lifestyle is spreading very, very rapidly.

For any business that wants to test its Internet-related strategies, I have a simple suggestion: Go to the group—university students, high-technology companies—whose members are living this Web lifestyle and see how your product does there. I tell bankers, "You won't detect a failure in your Internet strategy for many years because new consumers coming out of college, who expect lots of services, are not going to affect your business for a long time to come. And yet, if you think about the health of the company 10 years hence, those are the customers who will really make a difference."

"Web workstyle" is taking the Web lifestyle and mapping it into how you deal with information on your job. Take something simple like human-resource management. People pay lip service to the idea of soliciting all sorts of input and seeing if an employee is a team player. Well, in a Web workstyle environment, you can easily get 20 or 30 people to comment on the person's work. This is hard to do without a digital approach.

At Microsoft, if I find myself wondering about a certain group's morale, or I want to know if they understand their goals, it takes me about 10 minutes to put together a series of questions and mail them out. I can set things up so the responses are anonymous, which I do most of the time. Twenty-four hours later, after people each take a minute or two to fill out the form, I have the complete results. This is feedback at work. The digital environment allows for much better feedback at every level. As for using the Web to interact with your customers, there is a tendency to overemphasize having a great-looking Web site. There is nothing wrong with using a Web site as a forcing function, to make your employees look at the world of business differently. But if you do your Web site well, you'll find that it lets you organize information better than you do now. You can use your Web site to gather information by customer—what he's buying, what he's not buying but might be interested in—whereas most companies now organize their information by product line and ignore a lot of information that would help them understand their customers better.

I've said many times that these customer-centric views are very important. A lot of companies have grown up through acquisition, so it's hard to get even a basic customer history. Certainly, most companies don't capture every interaction with each customer so it can be called up on a screen in a few seconds.

These customer-centric views are actually inexpensive to create nowadays. It's very simple to reach out to mainframes and other older systems and pull down information, then use software developed in the PC and Internet environment that creates a rich view, and hides the fact that there are disparate older systems providing the information. The point is that you can get those rich views almost immediately, which gives you more time to rebuild those applications.

Now, to design a Web site that helps you understand your customers better, you have to have your company accept that the Internet really has changed the rules. If you have executives who haven't gone on-line and bought things or browsed for information, you should make that a mandatory homework assignment. Get them to use a digital camera. Have them send photos around. Push them to develop a sense of what the Internet is good for and what it's not good for.

A final thought here that may sound negative but that I think is crucial: Bad news must travel fast. As soon as a company gets electronic mail, executives start getting messages from people that say, "Hey, we've just won a certain piece of business. Let's celebrate." It's mandatory to send back a piece of mail saying, "Hey, congratulations." For some reason, you never get mail that says, "Hey, we just lost this piece of business." If you got it, I suppose you'd have to send back a piece of mail saying, "No, that wasn't what you were supposed to do. Next time, try harder."

It's just not human nature to say that things aren't going well. And yet when you ask yourself, what does management really need to know, it's much more important to have the bad news. Good news simply reinforces what you're already doing. It says, "Hey, we probably have our priorities right. We've got a pretty good plan. Let's just go full speed." Bad news, particularly if you catch it early on—where you see a very demanding customer starting to get unhappy, or a new competitor that is servicing customers' needs in a different way—enables you to use your best assets to respond in time.

QUESTION: I'm concerned about what technology is doing to us. How does it affect our communities and the glue that keeps the communities together—our culture? Also, is U.S. culture more susceptible than other cultures to being influenced by digital technology?

GATES: If you go back to when the telephone came along, there was a lot of discussion about how it would never be used in certain cultures, and about how the U.S. was the only place where the phone would thrive. But when you have a revolution in communications, the benefits are pretty universal.

Let's first just talk about the business environment. The fact that the PC, with the Internet, matches buyers and sellers efficiently speaks to the fundamental mechanism of capitalism. The imperative, therefore, to use this device in the business environment is unrelenting. Somebody can't say, "But our culture is to charge twice as much money because we don't want to use these new tools." In capitalism, that's not a very adaptive response when a new tool comes around.

Your question is a very good one as to whether the U.S. rate of Internet adoption will differ from those of other nations. I think Europe has been held back by the absence of the Internet in the universities. In the U.S., every kid who comes to work for your companies is a change agent pushing for the Internet to be used in the right way. The Internet is the way students have signed up for their classes, researched their homework, submitted their homework, and stayed in touch with their university community. If you look at universities in Europe, that hasn't happened yet. It will over the next two or three years, and I don't see anything to prevent the same sort of suffusion from the students out to the business world.

I was meeting with an executive from Volkswagen the other day, and he had been reassigned to Mexico City from Germany. He was worried whether his 15-year-old daughter would be happy about living in Mexico City. Well, the fact is that her ability to use the Internet to listen to German radio stations, read the newspaper, and stay in touch with her friends back in Germany, sending them photos and things like that, made the move acceptable to her.

Even when you get out of the business realm, into the personal realm, the Internet offers advantages. Do you want to learn if somebody you know is sick? Do you want to learn about your friend's disease and the latest research on it? Well, if you do, the Internet is there to help you. Do you want to have your kids' grandparents, who might live in a different place, see what's going on with them? Probably so. The Internet will be shaped by how humans want to do things.

Among the disadvantages I see is a possible widening of the gap between the haves and the have-nots. There's also the issue of privacy. And, the fact that you can belong to all these communities on-line means that, in a sense, you belong to your physical community a bit less. The U.S. has had that problem more than most countries, even before the Internet came along. People are more mobile and move to different areas. We already have some of the ills that come when people don't feel engaged with their neighbors.

By the way, some people say all the change because of the Internet is going to happen in two years. It's not going to happen in two years. When you say to business executives, "Well, you'd better adapt or you'll be out of business in two years," that's dangerous. In two years, when they say, "Hey, I'm not out of business," they might dismiss the Internet as exaggeration. I think we're really looking at a 10-year time frame. In 10 years, the behavior changes will run so deep that they'll be taken for granted. You won't even discuss them.

QUESTION: Could you give us some of your thoughts about the recent stock-market valuations of Internet companies?

GATES: It's as though people are assuming that they will be the market leaders. In a certain sense, the prices are rational because, if anyone here disagrees with those prices, you can go make the economic bet against them. Personally, I think the prices are very high—I think they're crazy, in a way.

There is one thing about the Internet that is unquestioned. For consumers, this is a great deal. Their ability to pay their bills over the Internet, get a better mortgage rate, find new things—all those add up to a great deal.

But what is the future business model for an Internet retailer? How does he or she make money? How much will he or she need to spend on marketing to keep people's attention, and what will the margin be on sales? I think you have to question some of the optimistic assumptions that are being made about Internet companies.

Look, these are wild times. We will look back on these times and say, "Well, wasn't that obvious? I should have shorted that stock." But, at the same time, there is nothing fraudulent or unreal about the core of what the excitement is about. I hope that if Internet stock valuations ever go to reasonable levels, people don't lose sight of the importance of what is happening.

QUESTION: I think Microsoft is an example of excellent management and has been for years. But are the issues that you're facing—the speed of change and the level of competitiveness—really relevant to other industries?

GATES: Certainly, the technology business is a hypercompetitive business. It has been for a long time. But other businesses are about to get a taste of that wild competition, too, because the rules are changing.

One challenge we all face is the need to hire good people. Good people are the start of creating what I call positive cycles. If you hire good people, you create good products. The products lead to financial success, which makes it easier to hire good people. If these stock-market valuations do come back to more normal levels, it will be important that you don't let the declines create negative cycles. People may be tempted to say, "Oh, well, doesn't the decline mean that what we're doing is wrong?" No, what it means is that the stock market got ahead of itself in a fairly dramatic way. But how to keep people from focusing on the stock price is a fascinating challenge, particularly because we're all using stock options more as compensation. It's a challenge that we have in spades, and I think other industries are going to face it, too.

QUESTION: I was struck that my invitation to this meeting arrived on a printed card via the U.S. mail system. I sent back my reply and then received a phone call from a conference person to make sure that I was going to be here. When I showed up this morning, there was a notebook with printouts of PowerPoint slides in it, plus two books and a magazine. What impressed me is that we still have all these different ways of communicating, some of which are going to give way and some that will remain as technology evolves. How do we know which forms will survive and which ones will perish?

GATES: We're in this transition period. Soon, organizing events, confirming arrangements and attendees, will all go through e-mail. In fact, it was interesting to see on the list of the attendees that there are e-mail addresses for 80% of the people here. So, the ability to organize events via e-mail is right on the threshold.

As for computer screens replacing printed documents, the quality of the screens—the resolution, for example—is just not there yet. But that will change. Take the encyclopedia. My friend Warren Buffett owns the World Book, and I said to him, "Hey, you're in trouble, Warren." He said, "No, the encyclopedia smells so good. People like it up on the shelves, and it's very prestigious." We joked about that, but today everybody knows that the $99 Encarta and other electronic encyclopedias are far more up to date, easier to navigate, and provide audio and video features. Electronic encyclopedias are just a superior way of doing things. Likewise, paper forms are going to go away very quickly.

As you suggest in your question, you have to take everything and say, "What is the balance? What do you get from a digital approach? What do you give up?" With things like encyclopedias and paper forms, the balance is so clear. The same is true for meetings where you are just informing people about something, with very little interaction. Get rid of them. Just mail people the PowerPoint slides or the spreadsheet and cancel the meeting.

However, electronic mail does not work so well for topics that are controversial. Mail is very poor for that. When it comes to getting people to compromise, getting people to see something they might not see, a face-to-face meeting is still far superior.

One of my challenges to our software people is to create a meeting-type environment via videoconferencing. One-to-one, personal videoconferencing to collaborate on a document is an area that I think is going to explode pretty rapidly.

I think we'll also see a lot of videoconferences among people who just can't get together in one place—videoconferencing is still better than doing just an audio conference. But if you have a meeting with, say, five to 10 people, where nobody is in the same place, it's just not as good as having everyone together in the same room. That's an unsolved problem.

I think the best case is that we'll start to see this sort of group videoconferencing in three or four years. I think we have to be very conscious about how people interact. One of our rules at Microsoft is, if you're going to tell somebody something very bad—a product delay, for example—it's often better to either call them or at least do that mail one on one. This becomes a sociological issue because if you say something really bad in an e-mail, the respondent might think you don't realize how bad it is. Companies will have to figure out the circumstances under which e-mail is an appropriate choice among their communication options.