Steve Ballmer, Ray Ozzie, Bob Muglia, Brad Smith: Press Conference Call on Microsoft’s Strategic Changes in Technology and Business Practices to Expand Interoperability

OPERATOR: Welcome, and thank you for standing by. At this time, parties are on a listen-only status until the question and answer portion of today’s call. Also as a reminder, today’s call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to our first speaker, Mr. Mark Murray. Sir, you may begin.

MARK MURRAY: Hi, and thanks for joining us everyone. We apologize for the delay. Frankly, the interest in this announcement was so large that it overwhelmed the ability of the operators to clear the queue. So we apologize for that. We also had a technical problem that we had to solve. So we’ll try to be efficient and move through this very quickly, because we know that folks are on deadline in a number of areas.

I’m joined today by Steve Ballmer, our chief executive officer; Ray Ozzie, our chief software architect; Bob Muglia, our senior vice president for Server and Tools; and Brad Smith, our senior vice president and general counsel.

We’re going to make a very significant announcement related to interoperability steps that the company is taking, and we will be taking questions at the end of this call. If you have a question, the operator will describe the procedures to raise a question.

With that, I’ll turn it over to our first speaker  actually I have one point to make, which is very important, which is this call is not about Yahoo, or the proposed Yahoo acquisition. We will not be taking any questions related to that. There has been plenty said and written about that. This call is related to the interoperability announcement that we’re making today.

Thanks very much, and with that, I’ll turn it over to our first speaker, Steve Ballmer.

STEVE BALLMER: Great. Thanks all of you for your time today, and again our apologies for the delay. Today Microsoft is describing a set of fairly broad changes to our technology and business practices, designed to further increase the openness of our products, and to drive greater interoperability and choice for developers, for partners, and for competitors.

Specifically, we’re implementing four new interoperability principles that will apply to our high volume products. Number one, we’re committing to ensure open connections for our high volume products. Number two, we’re committing to promote data portability for our high volume products. Number three, we’re committing to enhancing Microsoft’s support for industry standards. And four, we’re committing to fostering a more open engagement with industry, as well as the open source software community.

Each of these is phrased as a set of principles to apply into the future. There’s a set of specific actions. And today we are announcing some of the concrete actions describing how we will implement those principles, in addition to the principles themselves. I’m not going to go into all of the details, which are posted on our Web site, but I do want to highlight a few.

Number one, open connections. In this area we will document all of the APIs and communication protocols that are used by other Microsoft products. We’re announcing that developers will not need to take a license, or pay a royalty, or other fee to access any of that information. As an immediate first step to apply the principles today we’re publishing to the Web over 30,000 pages of documentation for Windows client and server protocols that were previously available only under a 4D trade secret license. In addition, protocol documents for additional products like Office 2007 will be published in the upcoming months.

Second, in the area of data portability, we recognize that different users definitely support different file formats for different reasons. And we have consistently supported multiple file formats and user choice. But, as part of today’s announcement specifically, we’re announcing that we’re designing new APIs for Word, Excel and PowerPoint that will allow developers to plug in additional document formats, and enable users to set those formats as their default for saving documents.

In the area of standards, we’re also going to document how we support various standards, including documentation of extensions we make to the standards. This should allow developers to understand how a standard is used in a Microsoft product and foster improved interoperability for our customers.

Lastly, in the area of industry engagement, we set out some years ago to form an interoperability executive council, which has been incredibly valuable in terms of input to us on important interoperability needs, but we’ll also launch, as a result of this announcement, what we’re calling our open source interoperability initiatives. This will provide a set of labs, plug-fests, technical contents, and other information to promote more interoperability between Microsoft software and open source software. We’ll also create an ongoing dialogue with customers and developers, as well as open source software communities, through an online interoperability forum available much more broadly than our interoperability executive council.

All of these actions, and the many, many more that the other folks will describe, and that will be described on the Web site, represent an important change in how we share information about our technologies and products, in our high volume products. While we’ve shared lots of information with our partners over the years, enabling developers to write many, many, many, now hundreds of thousands of applications, for example, for Windows, today’s actions represent a significant expansion toward even greater transparency and interoperability. I believe Microsoft’s long-term success depends on our ability to deliver a software and services platform that is open, flexible, and provides customers and developers with choice.

Brad will talk more about the legal ramifications of these principles. Suffice it to say, we are committed to living up to our legal responsibilities around the world, and we think this announcement is entirely consistent with the legal responsibilities that we have throughout the world.

I would now like to turn things over to Ray Ozzie, our chief software architect, to discuss the industry trends underlying these changes.

RAY OZZIE: Thanks, Steve.

When a new type of product or technology is introduced, vendors tend to focus first and foremost on little more than whether or not their product satisfies an immediate customer need, and in these early stage products innovation tends to trump interoperability, data portability, or any such concerns. But as users put more and more of their data into these products, a new set of issues emerge, whether it’s health records, or customer databases, as an industry we’ve progressively learned that documents and data have a lifetime that frequently spans well beyond the lifetime of any specific application that might have been used to create it. Issues such as document preservation and portability have become vital concerns for customers. Furthermore, as a direct byproduct of the Internet’s ubiquity, virtually every system and product nowadays has become interconnected in some way to most everything else. And so interoperability between our systems has also become a vital concern.

The announcement today represents an important strategy shift for Microsoft, a shift that’s significant for the engineers at Microsoft who build our products, for the development community that needs to interoperate with our products, and for our customers who rely upon our products to run their businesses. Today, we’re mapping out four key principles, as Steve said, related to the development and interoperability of our high volume products, such as Windows and Office. The detailed principles are posted on our Web site, but let me summarize them and reiterate them here just briefly.

The first principle is that we’re further opening the connections to our high volume products so that software developers, business partners, and competitors can more robustly interact with those products and extend them or invent new solutions for customers. We’ll do this by publishing detailed specifications of these products protocols and external APIs, including all such interfaces used by Microsoft’s other products. And so developers using these published specs to connect their own products to our products will be doing so using the same means that Microsoft’s own products use for such interoperability. We already make a lot of documentation available today to developers, but this principle reflects our commitment to an open and level playing field in interoperating with all of these high volume products. The full technical documentation for the protocols and APIs will be available to everyone visiting our Web site, and we’ll encourage broad community access and discussion. And for those who want to acquire patent coverage for their implementations of these protocols, we’ll make licenses available at low royalty rates and under reasonable and nondiscriminatory terms.

The second principle being discussed today is that we’re taking specific actions to enhance our products to promote the greater and more effective portability of data. As part of this announcement, we’re mapping out the means by which we’ll incorporate customer advice that will enable us to prioritize specifically which data format standards that we’ll support in our products. We’ll also be designing and implementing new add-in APIs for Microsoft Office that will enable other developers to develop support for their own additional document formats, and customers will now have the ability to select any of those formats as their default document format if that’s something that they choose to do.

The third principle being discussed today is our commitment to support standards across all our high-volume products in a way that enables real-world interoperability across implementations. There’s been discussion by some in the past as to whether Microsoft is serious about embracing industry standards, and about the methods that any vendor should be using in cases where both innovation and interoperability are important factors. In laying out this third principle, we map out the means by which customers will help us prioritize which specific industry standards that our products will support, and how we will ensure that we’ve implemented those standards in a way that’s interoperable with other popular products in the real world, and how we will continue to innovate in a fully open manner respectful to the role of standards and the committed individuals behind them. When innovating beyond a standard, we will document our extensions so as to enable true interoperability with other vendors of popular products that also implement or extend that same standard. Like our protocol documentation, we’ll publish these details so that they’re freely available to anyone on our Web site.

The fourth principle relates to how we’ll foster more open engagement with the IT community around the topics of interoperability and standards. And for a discussion of that topic, I’ll turn it over to Bob Muglia, our senior vice president for Server and Tools.

BOB MUGLIA: Thanks, Ray.

Let me pick up on our interoperability efforts for some time, and where we’re going in the future. As I think everyone knows in the industry, Microsoft has been concerned about interoperability for many years. In February 2005, we sort of formalized that with our Interoperability By Design Principles which are really focused on a broad set of interoperability goals. Since then, we’ve had a number of very significant steps towards our objective for interoperability. We announced the open specification promise, a license that allows open access to specifications by developers across the world. We’ve had a number of very important technical interoperability projects that have been underway. Our work with Linux and Windows virtualization as an example, FastCGI which is now integrated in to IIS 7 enabling customers to run very high performance, reliable implementations of PHP applications on Windows Server with full support from Microsoft.

We’ve had a number of important interoperability agreements between Microsoft and open source distributors, Novell, Xandros, Linspire and Turbo Linux, and we’ve worked very, very closely with the industry both in the form of an interoperability executive council, and an interoperability vendor alliance. Each of those organizations has had close engagement with Microsoft, and we’ve seen some very tangible results in the period of time since they’ve been in existence, which is approximately two years. We’ve been working very closely with these folks and we expect to continue to work closely in the future. We’ve had a lot of technical interoperability that’s been created in terms of work around the identity space, and in virtualization. We’ve been working very closely with organizations like JBoss, SugarCRM, XenSource, Zend, Novell, and SpikeSource on building really close alliances to create interoperability between Microsoft products and open source.

In that context, we’ve been working very closely with the open source community in terms of interoperability with Microsoft products. In December of last year, the Protocol Freedom Information Foundation, a nonprofit organization that’s been working with Samba, has allowed  has signed a license with us that’s allowed us to work very closely with Samba in an interoperability between their technology and Microsoft products. And very significantly we’ve been working with OSI, who has approved two of Microsoft’s shared source licenses, the Microsoft Public License, and the Microsoft Reciprocal License, which is really an endorsement of the approach that we’re taking towards interoperating and working with the open source community.

Those are all some of the many examples of the literally thousands of people across Microsoft that have been working towards an objective of interoperability with many, many different parties in the industry. And they’re all great building blocks that create a context for today’s important announcement. And we’re pleased that today’s announcement takes these steps, and provides a significant expansion on what we’re doing. There are contexts upon which we can build, and we look forward to working with developers and technology companies in the open source community to have a consistent and common approach to access to Microsoft products through these principles that are being announced today.

I want to emphasize that as we move forward with these principles, we are going to be very proactive in making the information available. We will immediately publish the more than 30,000 pages of protocol document that has been covered and that we created as a part of our work in both the European Commission, and the DoJ for the WSPP and MCTP licenses. That information will be published and freely accessible on MSDN.

In the coming months, and no later than the end of June, we will publish the protocols in Office 2007 that are used to connect to any other Microsoft product, including Exchange Server 2007 and SharePoint Server 2007, as well as — we will take the .NET Framework related protocols and publish those on our Web site, on MSDN.

We’ll be working closely with many, many organizations and many people around the world in terms of this open engagement, and we look forward to the creation of several new initiatives that are being launched today — an Open Source Interoperability Initiative to enable and engage with the open source community, a Web-based interoperability forum, which will allow anyone to interact with Microsoft and provide us with feedback.

As I mentioned, we have been working closely with the Interoperability Executive Council, getting great feedback on that. This is a Web-based forum which will enable anyone to interact with Microsoft and provide us with feedback in what we’re doing. We’re also announcing a document interoperability initiative to ensure that the documents that are created by users are fully exchangeable, regardless of the tools that they are using.

So overall we’re very enthusiastic about this. It’s a great step forward. It’s a major step, put in the context of work we’ve been doing over the past few years, and really for many years, to ensure that our products interoperate with others in the industry. And with that, I’d like to turn it over to Brad to have him make a few more comments.

Brad.

BRAD SMITH: Thanks, Bob.

I’ll conclude with just a couple of comments, first on the intellectual property rights that are being made available, or licensed pursuant to today’s announcement, and also a couple of words with respect to Microsoft’s competition law obligations. The announcement today covers both the sharing of technology information, such as the specifications for our communications protocols, and the licensing of the intellectual property rights that are relevant to this technology. So it’s worth noting how this applies to Microsoft’s IP rights in particular.

This really falls into the three categories. First, the principles we’re announcing today provide access free of charge to all of Microsoft’s trade secret rights relating to APIs and communications protocols in our high volume products. Going forward developers will not even need a trade secret license, which is something that was needed for our communications protocols in the past. Instead, developers will be able to access this information in the same way that they access any other page of content on the Web. Indeed, this information went live just earlier today.

Second, the principles provide royalty-free use of the patent rights relating to Microsoft’s APIs in these products, so that any other software that calls on these APIs in Microsoft’s products can do so without any concern about patent issues.

Third, the principles address the patents relating to communications protocols in particular. This has been an especially important topic in recent years. Specifically the principles apply to all of Microsoft’s high-volume products, the same patent framework created last October for the narrower category of patent rights relating to the protocols addressed in the Court of First Instance’s decision in Europe. This patent framework for these protocols has two pieces.

The first part of this patent framework is a commitment by Microsoft to make available patent licenses for the protocols on reasonable and nondiscriminatory terms, and at very low royalty rates. The second part of this patent framework addresses open source developers in particular. Microsoft is providing a patent covenant not to sue open source developers for development, or noncommercial distribution of implementations of these protocols.

This covenant will use the exact same terms created in October for the protocols covered by the CFI decision. This means that open source developers will be able to use the documentation to develop implementations of these protocols without paying for a patent license. Companies that subsequently engage in commercial distribution of these protocol implementations will be able to obtain a patent license from Microsoft, as will enterprises that obtain these implementations from a distributor that does not have such a patent license. So that’s how we’re addressing the intellectual property rights.

Finally, just a few words on our competition law obligations. The interoperability principles and actions announced today reflect the changed legal landscape for Microsoft and the information technology industry. Today’s announcement represents an important step in a positive direction, to address the obligations outlined in the September 2000 judgment of the European Court of First Instance. As we said immediately after the CFI decision last September, Microsoft is committed to taking all necessary steps to ensure that we’re in full compliance with European law. We will take additional steps in the coming weeks to address the remaining portion of the CFI decision.

We’re also committed to providing full information to the European Commission and other governments, so they can evaluate all of these steps. We’ll look forward to addressing any feedback that the Commission or other governments may provide to us, and we will move promptly to address feedback in a constructive way.

Thank you. Back to Mark.

MARK MURRAY: Thanks, Brad. Thanks to all our executives.

(Operator Direction.)

MARK MURRAY: While we’re waiting for questions to queue up, I just want to take care of one housekeeping matter. As Steve mentioned, you can find all of the information related to this announcement on our Web site, www.microsoft.com/presspass. You will also be able to access a replay of this phone call if you need it for any purpose, to get quotes, or to get notes from. That will be posted up to our Web site within the next hour or so, and we’ll also be putting a transcript up there. That’s probably going to take a couple of hours. So that information, plus the principles themselves, a summary of the principles, and additional information is available on our Web site.

Operator, do we have any questions yet?

(Operator Direction.)

CHARLES DIBONA, Sanford C. Bernstein: Hi, I just wanted to  if you could put this announcement about interoperability in the context of prior statements you all have made about intellectual property, and the potentials for misuse of it in particularly some open source products, more broadly. Is there any impact here on your stance about that sort of broader use of intellectual property, any softening of those kind of positions, or any kind of retroactivity toward those kinds of issues you saw before?

BRAD SMITH: This is Brad Smith. I’d offer a couple of thoughts. First, we’re not announcing any change today with respect to our broader perspectives on intellectual property rights, whether it’s patents, copyrights, or trade secrets. But, what we are announcing today with respect to interoperability and this particular technology is, I believe, quite important, with respect to intellectual property rights. And specifically, we are carving out a portion of our patent rights and providing a covenant to open source distributors that I believe conveys very strongly that open source developers do not need to worry about addressing these particular patent rights. I think there are two things in particular to keep in mind with respect to this.

First is the scope of the patent rights that are affected. What this addresses is the patent rights relating to our implementations of our specifications of our communications protocols. So, in effect, this is technology, and a set of IP rights, that people have said is very important for interoperability, and we are addressing this in a broad and new way.

Second, and I think that this is also worth putting into perspective, just as we did last October when we hammered out the final details of our compliance with the European Commission’s 2004 decision, there’s a clear distinction here between people who are developing open source software and engaging in non-commercial distribution on the one hand, and people who are engaging in commercial distribution and use on the other hand. With respect to the former, meaning developers and those engaged in noncommercial distribution, this new covenant not to sue, with respect to patent rights, is applicable.

On the other hand, with respect to companies that are engaged in commercial distribution, or use internally, there is a need to obtain a patent license where there are applicable patent rights, and we’re committing to make these patent licenses readily available. Novell already has an agreement with us that covers all of these patent rights. Some other companies, such as Xandros and others, also have a patent license. So they’ve already addressed all of that, and their users are already addressed. With respect to other distributors, and users, the clear message is that patent licenses will be freely available.

STEVE BALLMER: Patents will be, not freely, will be available.

BRAD SMITH: Readily available.

STEVE BALLMER: Readily available for the right fee. The basic economic analysis that you should go through sort of goes like this. We have valuable intellectual property in our patents, we will continue to view that as valuable intellectual property in all forms, and we will monetize from all users of that, not all developers, but for all users of that patented technology, all commercial developers, and all commercial users of that patented technology.

We also have trade secret information, which we will continue to protect, with the exception of some important trade secret information in the interoperability realm, which we will still value, but we will make available free of charge, so that people can do appropriate interoperability. So from an economic perspective you could say, in some senses, we’re opening up. Yet, at the same time, we retain valuable intellectual property assets.

MARK MURRAY: Great. Thanks very much. And, operator, I understand that we have another question.

(Operator Direction.)

JESSICA MINTZ, Associated Press: Good morning. I am looking over the EU statement. It sounds like they’re a little skeptical about the reach of this agreement, and they said something like, they’ve heard similar announcements from Microsoft in the past. Can you address their skepticism, and talk a little bit about how this goes beyond what you’ve done?

STEVE BALLMER: Sure, I think it’s important. The Commission has posted a statement, and they speak for themselves. We certainly don’t speak for the Commission. I think we’re happy to talk about ways in which what we’re announcing today is certainly expanded and new from anything we’ve done in the past. And that’s probably the right thing. Maybe Brad will focus on it.

BRAD SMITH: Exactly, we’re not here to characterize anything that the Commission has said. At one level we’ve always been very clear when we’ve taken interoperability steps in the past. We’ve always said with respect to each step that we weren’t claiming that any particular step would be the last step we’d ever take. We’ve always been clear in stating that we weren’t claiming that any step that we took was the best step that could ever be taken. This has been a continuing evolution, not just, I might add, for Microsoft, but in our view for the entire information technology industry.

All of that said, I believe that today’s step is certainly qualitatively, and quantitatively different from any step that we as a company have taken in the past. And there are two things worth nothing in this regard.

First, when we put together and issue a set of principles of the sort that we’re releasing today, we recognize that it’s committing the company not just to mere words. We’re committing the company to actions consistent with these words, actions that will live up to these principles completely. For that reason, people like Ray Ozzie and Bob Muglia have spent substantial time with our engineers to really work through what this means.

Second, we recognize that ultimately people will test and assess us not by the words, but by the actions that we take to implement them. If there’s one thing that stands out in today’s announcement, I would point to the fact that we’re not just issuing principles. At the same time that the principles went up on the Web, so did 30,000 pages of technical documentation. This documentation took literally years, and millions of dollars of software engineering work to create. Up until today, one needed to enter into a trade secret license to obtain it. One needed to pay a fee to obtain it. And yet, as of this moment, it’s available to anyone who has access to the Internet anywhere in the world. And we recognize that this publication of 30,000 pages, as significant as it is, is, nonetheless, a first step to implement these principles.

As Bob Muglia mentioned, over the coming weeks, and next few months, we’ll be posting on the Web many additional thousands of pages of technical documentation. Documentation that covers the communications protocols with respect to all of our high-volume products. These will be going up in beta form starting in April and be completed by June. It includes documentation relating to file formats, such as XAML. It is very forward-looking in terms of addressing the products that are of interest to others in our industry.

So we absolutely appreciate and respect that others will assess how we live up to these principles. We fully expect that, and are prepared for it, and yet I fully believe that as people do test this proposition in the months to come, I think they’re going to come away with a high regard for the steps that our engineers are taking.

MARK MURRAY: Operator, we probably have time for one or two more questions.

(Operator Direction.)

BRIAR DUDLEY, Seattle Times: Good morning, guys. I’m curious to know if a more open approach is really critical to Microsoft’s future, why weren’t these steps taken sooner, and on your own, and also how much do you expect these steps to insulate the company from future antitrust actions in Europe and other countries around the world?

STEVE BALLMER: Well, these steps are being taken on our own. They are being taken on our own. There certainly were things we did, absolutely, to get in compliance with the European Commission decision, and with the consent decree here in the United States, but these principles are being taken on our own accord, and do reflect both kind of the reality of our unique legal situation, and our view of what will be required, but also, quite frankly, what we see as new kind of opportunities and risks in the more connected world.

The world we grew up in was primarily a world of individual machines with people writing programs. And the greatest source of value-add around most of our products, frankly, was the value-add that came on the machine that ran our products, Windows, Office, whatever the case may be. In the more connected, services-oriented world that Ray Ozzie has had a chance to describe, and others, one of the greatest value-adds in some senses will be what people do, so to speak, on the other end of the wire. And opening up, particularly for our high volume products, and letting third parties, you could say, hey, we open up new opportunities for third parties to take share from us, I guess that’s right, but at the same time we open up new opportunities for third parties to add value around our offering, and the combination of the changed environment, the new opportunities that it presents for our customers, for developers adding value around us, there are risks certainly that come with it, but we think on balance it’s both consistent with what we will be doing anyway from a legal perspective, and is pro customer, and frankly net should be a good thing in the long-run for our shareholders.

RAY OZZIE: I would just like add one more thing to what Steve said about interoperability. I think that as individual end users sharing information across the Internet, and putting more and more and more of our records in documents, interoperability has become important for end users. Also, enterprises, we’ve gotten tremendous feedback over the past years from our enterprise customers that interoperability is extremely important to them because the data center, the modern data center in many cases is a very heterogeneous environment, and having our systems designed from the outset, engineered from the outset with such interoperability from day one is extremely important. This is a very important strategic shift in terms of how each and every engineer at the company views what their mission is and what their job is. They have to consider what the customer environment is, what the deployment environment is into which the software that they create is being put. As I said, I believe this is an important announcement for the engineers at Microsoft, for our partners, for our competitors, and for our customers.

MARK MURRAY: Great. Thank you Ray and Steve.

Operator, I apologize, we probably have time for just one more question. So do you have another question teed up for us?

(Operator Direction.)

LARRY MAGGOT, CBS News: Actually, my question was answered. Thank you very much.

MARK MURRAY: Okay. do we have any other questions?

(Operator Direction.)

KEVIN O’BRIEN, International Herald Tribune: Thanks for your time. I just wondered if Microsoft was going to continue to pursue the standardization for Office Open XML before the ISO, and how does that relate to today’s announcement?

STEVE BALLMER: We are continuing to pursue the standardization of Open XML through the ISO process. It’s certainly consistent with the notion of standards, and standards support, and a number of things articulated in the principles. We will, from time to time, in conjunction with industry participants, look to lead the standardization process, and sometimes we will look to be on the receiving end implementing important standards, and the principles comment is to both of those. So, yes, we are continuing through the standardization process with a variety of industry participants on Open XML.

MARK MURRAY: Great. Thanks very much and apologize if there are other folks who had hoped to ask questions, because of the amount of time, we’re just not able to accommodate those. Please feel free to follow-up with me or with others from Corporate Communications, and we’ll try to get answers to your questions. As I said, there will be an audio replay of this call available both on PressPass and via dial-up, and we’ll have a transcript posted probably in the next hour-and-a-half to two hours. So thanks very much everyone, for joining us, and apologies for the delay. Bye-bye.

END