3%? 6% ? 6% Covers 20% 25% 25% Accessories 20% 25% 25% The following outlines the negotiation scenario financially: From: Kevin Turner Sent: Sunday, November 4, 2012 9:06 AM To: Steven Sinofsky; Steve Ballmer Subject: RE: Surface sales physics after a week This is a complete surprise to me.... I had always planned on us bringing Surface to mass retail in the first quarter of 2013 and this is something that requires us to really carefully think through. 9 EFTA_R1_01741992 EFTA02572396

Explaining our Surface performance through the Holiday is very positive, simple and straightforward in my view.... It is also the truth.... The gist of our message would be "We are new into pc/tablet hardware business. We purposefully limited our distribution to our own stores and on-line to learn about the product and how it would be received by consumers and to allow us to refine our manufacturing, supply chain and logistics in preparation to bring it to mass retail in 2013. The response from consumers has been incredible, our stores have been over-run with customers wanting to learn more about surface and the selling performance of the devices has exceeded our expectations. We are now in a position to bring this wonderful product to everyone through our retail channel partners in the first quarter of 2013 as we launch our Pro version." I think this is one of the easiest stories we have ever told. I philosophically disagree that Surface will be labeled a failure if we don't do mass retail distribution by December 1. I actually believe if we try and jam it in and it doesn't land well or perform well at mass retail then it will for sure be labeled a failure. This is why I believe this requires a more thoughtful approach. Also post the Holiday allows the device a better chance to stand on its on at Retail as the noise of competing devices and fixtures between now and the end of the calendar year is and will be deafening Some business concerns I have in jamming this into Dec 1; 1. OEM's would be incensed... Communication that we are doing this before Dec. 1 would be brutal, bloody and further damaging to our trust/relationship. There is no way to spin this as we would be taking money out of our OEM's pocket directly in this holiday selling season. We simply can't do a quality job of this communication in this time frame and it will be viewed as very insincere given the timing. 2. No way to do a quality in store fixture, signage and get it made and get it rolled out in retail stores. Having a dead device in retail would almost be a certainty. Not landing Surface properly at Retail would be very brand damaging. 3. Very difficult to properly train RSP's during the busiest time of the year. So the controlled experience we have in our stores would be compromised. Yes people want to the feel the hardware, but they also want to understand the software, the apps, how you use it, etc. We aren't finding people in our own stores who feel the hardware and want to own it, they want to know what it does and how it works. 4. Quality of the product- is still not known. We are too soon into this to understand what our quality issues are, what our return rates are/will be etc. Note; we are doing a white glove experience and having an 8% plus return rate. S. Our Supply chain performance and execution has been difficult and bumpy to date. We are shipping units from China direct to our stores today... this isn't scalable for retail stores WW. 6. Our on-line volume has been hampered tremendously because we were told to put on the web-site — "a 1 to 3 week delay in shipping"... We are currently out of the 32 GB tablet on line today.... Note, we just removed the 1 to 3 week delay language last Friday. I do expect our on-line volume to increase as a result. 7. We just launched on Friday the ability to do sales to corporations... Too soon to tell what this will mean but we know we will have increased demand there. 8. I think we need some work on our sku's. Forcing a black touch type key board with the one sku is not what most customers want and it is a customer dis-sat issue.... I think we need to analyze this and consider modifications.... 9. In the USA I would not do BBY without doing some number of stores at Wal-Mart. Wal-Mart is the number 2 player in retail pc's in the US and is growing and BBY is shrinking. 10 EFTA_R1_01741993 EFTA02572397

10. Everything about Surface has been thoughtful and deliberate and calculated and this goes against that in every way shape and form and I don't get why would even consider this right now. My recommendations; 1. Take Surface NOW to other retailers in China. Gome, Mall Stores, etc. 2. Extend our Holiday stores NOW for next calendar year. 3. Start on a plan now to properly take Surface to mass retail in Jan/Feb with the Pro launch,. 4. Strategize how we tell our OEM's on our plan to take Surface to mass Retail, then we must properly tell the OEM's. 5. Accelerate our physical Stores in the US and open physical and pop up stores in the Canada, UK, Australia and China in 2013. From: Steven Sinofsky Sent: Sunday, November 04, 2012 8:31 AM To: Steve Ballmer Cc: Kevin Turner Subject: RE: Surface sales physics after a week Jeremy Dale has been involved but I don't know what he has communicated. We are trying to keep this low until we decide given the sensitivities. Vince Messina on our team is doing the primary driving as he did the Sunning deal in China. Since he does all the hardware assortment already, he worked closely with CCG who supported his lead. 11 EFTA_R1_01741994 EFTA02572398