JIM DESLER: Thank you very much and thank you all for joining early this morning. About an hour ago Microsoft issued two press releases announcing two separate settlements, one with Novell and one with the trade association CCIA. We wanted to take this opportunity to discuss the settlements and other related issues this morning with our senior vice president and general counsel Brad Smith. Also with us today to help out with some questions after Brad’s opening statement will be Mary Snapp, S-N-A-P-P, she’s corporate vice president and deputy counsel, and John Seethoff, S-E-E-T-H-O-F-F, and John is deputy general counsel here at Microsoft.
So without further ado, I’ll have Brad open up with a statement and then we’ll have a little bit of time for Q & A. So Brad Smith.
BRAD SMITH: Great, thanks, Jim and thanks to all of you for joining in this call. I thought I would briefly summarize the two announcements that we have put out and then offer a couple of initial comments on what we think they mean to Microsoft and our industry and then I’d be happy to answer questions.
As you can see, we’ve put out two press releases today, one announcing a settlement with Novell and the other announcing a settlement with CCIA. Our settlement with Novell covers all of the antitrust issues relating to Novell’s Netware products as of today, as well as all of Novell’s other current businesses as of today. This means that we have resolved Novell’s claims under U.S. antitrust law. Novell was in a position where it could have filed a private antitrust lawsuit in the United States seeking to rely in part on the findings of fact issued by the District Court in our antitrust case. We were able to turn to a mediator and without having to go to court we were able to mediate those claims successfully. We benefited from the mediation work of Eric Green who is a well established mediator, who was also the mediator in the successful negotiations in 2001 that led to a settlement between Microsoft and the Department of Justice and nine states attorneys general at that time.
In addition to resolving the U.S. claims, Novell has agreed to withdraw from all further participation in the European Union case against Microsoft. That includes the so-called interim measures case as well as the case on the merits. As you’ve seen, Microsoft has agreed to pay Novell $536 million to resolve those claims.
We and Novell were not able to reach agreement on one other claim that Novell asserted in these negotiations. That is a claim relating to Novell’s ownership of the WordPerfect business for a bit under two years, from 1994 to 1996. We did not regard that claim as being of anything close to a similar magnitude and in general we believe that the claim doesn’t have merit and is barred by the statute of limitations at this point, but we’ve all resolved to turn to the courts for an answer on the WordPerfect claim.
We also announced today an agreement with CCIA. Under the terms of that agreement, CCIA similarly is withdrawing from all further participation in the European Union litigation, both the interim measures case and the merits case. In addition, CCIA is withdrawing a complaint that it has pending before the European Commission regarding Windows XP. That complaint, as many of you may know, was a principal obstacle to our ability to negotiate a settlement with the European Commission this past March. We were able to reach agreement with the Commission on all of the issues in the present case that is now before the Court of First Instance, but we were not able to reach agreement on the issues in the CCIA complaint. The CCIA complaint has now been withdrawn. CCIA also agreed not to seek review by the Supreme Court of the U.S. lawsuit.
We’re also delighted to have the opportunity to join CCIA as a member and to work with CCIA on a wide variety of issues that we believe are important to the future of our industry.
Putting the two things together, I would note two important aspects of today’s agreements. First, these agreements represent another substantial milestone in Microsoft’s resolving the issues that have divided our industry over the past decade. The agreement literally brings to a close, finally, the longstanding U.S. antitrust lawsuit that began in 1998. There had been three parties that had remained in that lawsuit. The State of Massachusetts had previously announced that it would not seek Supreme Court review. Another trade association, SIIA, had allowed its deadline to file review with the Supreme Court to lapse and it did not seek review. CCIA had requested and received from the Supreme Court an extension of time under which it could file with the Supreme Court. Today’s settlement means that it is not filing. Today’s settlement means that the longstanding antitrust litigation in the U.S. is now over. We, of course, have a very important Consent Decree and we are very focused on complying with that but the litigation phase is now complete.
Similarly, this case represents an important milestone in our reaching agreement with the competitors that have been active in the European proceedings. In our minds there were five entities that were very broadly involved in the European case.We have now reached agreement with four of them. We have reached agreement with AOL-Time Warner, now Time Warner in May of 2003, we reached agreement with Sun Microsystems in April 2004, today we are announcing agreement with Novell and CCIA. That really leaves only one entity that at least in our minds has been involved in a very broad way, and that is Real Networks. It means that Real Networks is now really standing alone in terms of continuing with the litigation path in Europe and elsewhere.
We believe that this sends a strong message that we and other companies in our industry do have the capacity now to sit down face to face and resolve the kinds of thorny antitrust issues that in the past were left instead to the government to resolve. We think that’s important in Europe as well as in the United States and elsewhere and we’re very pleased with this type of additional progress.
The second major theme in my mind that is quite important is the foundation this creates for our industry to work together on the important issues of the future. These agreements help unite our industry on the key issues that will affect our ability to grow and create jobs in the United States and around the world.
We are all looking to the next four years of an administration in Washington and the next five years with officials in the European Commission soon to take office in Brussels.
And as we look on both continents to these next number of years, it’s clear that there are a number of issues that will be very important for our industry: We need to ensure strong support for research and development, as well as strong support for the types of immigration policies that will enable software developers to continue to come work for companies in the United States.
We need to take the kinds of steps that will broaden Internet access and protect the consumer privacy and security rights that are important to giving consumers confidence in using the Internet.
As we increasingly lay to rest the issues that have divided our industry over the past decade, it creates the foundation for us to work in a stronger manner as an industry to address the economic and other issues that will be important in the future, so we’re very pleased by that aspect of this as well.
Reflecting the progress that we have continued to make in resolving the antitrust issues, we have reached a point where for the first time we believe we can estimate as a company the additional exposure that is reasonably possible that Microsoft will incur as a result of all of the remaining antitrust cases and claims, and therefore we included in our press release the point that we are estimating that it’s reasonably possible that Microsoft will incur additional exposure of up to $950 million for the remaining antitrust cases and claims. That includes all of the remaining cases such as the Real Networks case and the Burst case. It includes the remaining class action litigation in the United States. It includes all other claims of which we are aware. So that too reflects I think the significant progress that today’s agreements represent.
With that, I’d be happy to answer questions. Mary Snapp is here, as you know. She was the lead negotiator for us with Novell. And John Seethoff is here and he is involved in all of the financial aspects of this.
JIM DESLER: Great. With that, any questions?
QUESTION: Hi, Brad. Jonathan Krim at the Post.
BRAD SMITH: Hi, Jonathan.
JONATHAN KRIM: How are you?
BRAD SMITH: Good.
JONATHAN KRIM: The one thing you said that caught me a little off guard was I was under the impression that SIIA was an active intervener in the EU case.
BRAD SMITH: It’s a good point, Jonathan. There are a couple of other interveners. In our minds, they certainly have been not as active and they have not played as broad a role in the case. SIIA is the other Washington-based trade association that is an intervener. They filed some brief written comments with the court. They did not participate in the oral aspects of the hearing, they simply said that they were supporting CCIA and CCIA’s counsel, but they did not have their own counsel participating in the hearing.
There is also the Free Software Foundation that has been involved in the case but the Free Software Foundation has made clear throughout the case that regardless of what happens they will not take a license to any of our technology or intellectual property rights because they’re opposed as a matter of principle to paying any royalty for any technology or any intellectual property rights, and there is a small company called VideoBanner that made a short presentation.
But in our minds we’ve always looked at the European case as having five companies or entities that were really involved in a broad-based and significant way, and we have now reached agreement with four of those five.
QUESTION: Are you in any negotiations or have there been any talks with Real Networks?
BRAD SMITH: I wouldn’t want to comment on when we’re in negotiations and when we’re not, or whether we’re in negotiations and whether we’re not.
I would say this however: I think today’s agreements demonstrate clearly that we are prepared to meet anyone half way to see if we can resolve our differences. And the fact that we’ve now been able to find common ground with these four entities over the last 18 months demonstrates that we are prepared to sit down with anyone to find common ground.
We think that our industry and consumers are better served if we can find common ground with others in our industry. Only when we can’t find common ground should we turn to the courts or to the government.
QUESTION: Great, it’s Seattle PI. Morning, everybody.
BRAD SMITH: Hi, Todd.
QUESTION: Hi. Brad, you mentioned that today’s settlement, or actually you mentioned that CCIA’s Windows XP complaint played a role in thwarting a settlement previously in the EU. Does this now increase the prospects of settlement in the European Union?
BRAD SMITH: Well, it certainly doesn’t hurt. We’ve had a clear position on our approach to resolving the issues in Europe and nothing has changed. I do think that today’s agreements demonstrate that we in the private sector are able to sort out these issues. I think there is clearly less need for European Commission to persist with litigation on behalf of competition when virtually all of the competitors are now saying that their issues have been resolved to their satisfaction. That doesn’t mean that every competitor is now saying that, but increasingly the strong majority of competitors is saying that their issues have been resolved.
It seems to me that if competitors are saying that their issues have been addressed, then the interest and needs of competition have been addressed as well and we would hope that this is the type of factor the European Commission would take into consideration.
QUESTION: Hi, Brad. This is Reed Stevenson of Reuters.
With regard to the EU decision, I know you went into some detail in the answer to Todd’s question earlier, but could you just outline how confident you are of ultimately resolving issues with the European Union going forward?
And the second question is, was your settlement with Sun earlier instrumental in your talks with the CCIA?
BRAD SMITH: I think to take the second question first, I would again say it certainly didn’t hurt that we had reached an agreement with Sun. Sun is one of several, actually quite a number of important members of CCIA. Time Warner is also a member of CCIA, and the fact that we were able to reach agreement with the two of those I do think was helpful at a number of levels, including simply showing people that we are a company that is prepared to sit down, we’re prepared to be creative and we’re prepared to take every reasonable step to find common ground with others, even those with whom we have disagreed.
And obviously with CCIA we had been in disagreement for over a decade through several waves of antitrust disputes in the United States and Europe and elsewhere, so from that standpoint it’s quite important.
I think with respect to your first question and the EU situation, more generally we have to continue to take things a step at a time. We’ve had a clear strategy that we have been pursuing. That strategy has been to sit down or reach agreement with competitors to everyone’s satisfaction, and we did that with Sun, now we’ve done that with Novell and we’ve done that with CCIA.
It’s also I think clearly the case that we need some help from the Court of First Instance in Luxemburg. It doesn’t mean that we have to win on every issue in the interim measures case but we do need to win on enough issues that the message is clear that the Commission’s current path is not a path that is well founded. If we can get that kind of help from the CFI, then I think the door is more clearly open to see if there’s some other way to resolve the issues in Europe. We’ve always been prepared to explore all other opportunities. I think the Commission has made clear that it needs a little bit of additional persuading. So we’ll just have to let the folks at the Commission make up their minds as to what is the right approach and when, but clearly from our perspective these are two additional important steps down a clear path that we have been pursuing.
QUESTION: And, Brad, one follow-up. I know you and Steve were in Brussels in the final hours of the EU decision and it seemed that settlement talks were completely thrown off, but I guess without asking you whether you’re in settlement talks, are you open to a settlement with the EU?
BRAD SMITH: Well, we’ve been very clear every time this question has been asked, every time, not just for months but for years, we think that these types of issues are best resolved by sitting down with people and talking face to face. That is true for disputes with others in the industry, it is true for questions or disagreements with people in government.
These are very complicated, technical issues. They tend to usually be complicated legal issues as well. Given that kind of complexity, I think everyone benefits if people can really spend time with each other, understand each other’s points of view and find common ground that makes sense, given all of the important nuances.
There’s no discussions going on at the moment, but our approach remains the same that it has always been.
JIM DESLER: Thank you, operator. Next question, please.
QUESTION: Jim Rowley from Bloomberg. Good morning, Brad.
BRAD SMITH: Good morning.
QUESTION: Good morning. Just one twist on that question; you said that the withdrawal of the CCIA complaint of February 2003 removed what had been an obstacle to settlement issues. I think this then moves the ball forward significantly.
BRAD SMITH: Well, I don’t disagree with your characterization. It was very clear when we sat down in March that while we were able to resolve the issues in the current case, we were not able to come to agreement on all other issues and in particular the issues in the CCIA complaint. And I think both sides acknowledged as much pretty explicitly when the negotiations broke down.
So the fact that the CCIA complaint has now been withdrawn certainly removes one of the most substantial, I guess I would probably say, the most substantial obstacle that had made it difficult or impossible to reach agreement with the Commission in the past.
JIM REILLY: I think that would clear the way for a settlement then.
BRAD SMITH: It doesn’t hurt, but it takes two to agree, it only takes one to litigate. So it’s not just our view that matters.
JIM REILLY: Thank you.
QUESTION: Yeah, Alexei Barrioneuvo with the Wall Street Journal. Hi, Brad, again.
BRAD SMITH: Hi.
QUESTION: I wanted to ask you, I understood that Sun got some sort of business practice concessions from Microsoft. What is Novell really getting from this, other than a cash payment?
BRAD SMITH: Well, I think I should leave to Novell to speak to the benefits that they believe they’re deriving from the agreement. What I can say explicitly is that the agreement with Novell contains no license or obligation on Microsoft of any type to share technology or intellectual property rights of any type. So it is an agreement to agree on certain issues and release legal claims. It is an agreement for the payment of money and it is an agreement to disagree on the WordPerfect claim and turn it to the courts on that claim instead.
QUESTION: Just a follow-up really quick, can you help me understand is there any difference between this agreement and the Sun agreement, any substantial or substantive agreement, any difference between this and the Sun agreement?
BRAD SMITH: Well, the Novell agreement is quite different from the Sun agreement because the Sun agreement really was a set of different agreements. It includes a very broad Technology Collaboration Agreement where we are sharing and licensing certain technology and intellectual property rights to Sun and Sun is doing the same to us. There was also a broad patent covenant not to sue and [a] stand-still agreement between Microsoft and Sun. So the Sun agreement was quite broad in terms of these kinds of additional steps.
The agreement with Novell does not address patent rights in any way, backwards or forwards, and it does not have a Technology Collaboration Agreement as part of it.
JIM DESLER: Thank you.
Operator, we have time for two more questions.
QUESTION: Hi, Brad. This is (Jans Eckart ?) from Handelsblatt.
Do you have a total number at your fingertips of what Microsoft has paid for the settlement so far?
BRAD SMITH: What I can tell you is if we can do the math together it should be pretty easy. We paid AOL-Time Warner $750 million, we then paid Sun $700 million — and I’ll come back to that in a moment but it was $700 million for antitrust cases. Today we are announcing that we are paying Novell $536 million. We have previously reserved in excess of $1 billion for the state class-action cases. So if we add them up, that would come to just under $3 billion for those four pieces.
I should note that there was also the payment of two other sums of money to Sun Microsystems. One was a payment of $900 million to resolve patent issues; those were not antitrust issues. And the other was the payment of $350 million on the advance royalty payments under the Technology Collaboration Agreement. So there was another $1.25 [billion] on that side of the ledger.
QUESTION: OK. And the reserves of #1 billion, they are basically covering the 950 million that you’re still expecting?
BRAD SMITH: No. The $1 billion was previously reserved for the state class-action cases, and of course we’ve been announcing over time settlements, we’ve settled over a dozen of the state class action cases.
What we are saying today is that in addition to that roughly $3 billion that we have paid to date, paid or reserved to date, we are estimating that it is reasonably possible — those are terms defined by the securities laws — that we are estimating that it is reasonably possible that Microsoft will incur additional exposure on the antitrust claims of up to $950 million, so that’s $950 million in addition to the amount of money that we have paid or reserved to date. That’s the $950 million being the amount that we estimate it is reasonably possible we will incur under accounting rules.
JIM DESLER: One last question, please.
Gentlemen, I don’t know if you’re the right people to ask this question of, but given that you’ve made this settlement with the CCIA, do you have some idea of what kinds of initiatives Microsoft might take now that they are going to have a different kind of relationship with the CCIA?
BRAD SMITH: We certainly do have some idea of some of the issues on which we’ll be working and we’ve pointed to some of them in our press release with CCIA. I would highlight a couple.
I think that our industry faces some very important issues that will affect our ability to be an engine of economic growth in the United States and around the world. I would put at the forefront of that the type of strong support for research and development that we need for our industry to continue growing. That includes federal government support for research and development, basic research in universities in particular.
I think we face a very important set of immigration issues in the United States. Our industry has grown in the United States in no small measure because companies here have been able to recruit many of the best and brightest software developers in the world to come work here. And yet we need strong support from the Congress on the immigration laws if companies are going to continue to have that opportunity.
We clearly need additional steps to broaden access to the Internet, especially with respect to broadband usage in the United States and around the world. Some of those steps will be taken by private sector but some of those steps need to be taken by the public sector as well.
And we need very strong collaboration within our industry and with people in government especially on issues like security and privacy. We’ve all seen the broadened problems in the security area over the last two years, and those range from malicious code like viruses and worms to consumer annoyances like spam to emerging problems like spyware. Companies throughout the industry are going to have to develop new and better products. We’re all going to have to take new initiatives as companies I think to provide consumers with additional security tools. We also need stronger collaboration with governments to address the security issues.
So those are some of the issues on which I hope and think that we’ll have the opportunity to work with others in our industry and with CCIA.
QUESTION: Thank you very much. That’s a good complete list.
BRAD SMITH: Sure thing.
JIM DESLER: Thank you very much. Again, thank you, everyone, for taking a few moments out of your morning. There’s an audio replay of today’s call. The call numbers in the United States: 866-416-1171, internationally 1.203.369.0712 and that will play throughout the week.
Also for more information on today’s announcement as well as the press releases, please go up to our PressPass Web site at Microsoft.com/presspass.
Again, thank you for joining and good day.