Transcript of Remarks and Press Conference: Brad Smith, senior vice president, general counsel and corporate secretary, Microsoft Corporation

Announcement Regarding Release of Windows Vista in Europe and Korea

October 13, 2006

Mark Murray,General Manager, Corporate Public Relations and Public Affairs, Microsoft: Good afternoon everyone, and thank you for joining this call at such short notice. As I think you will all have seen, we have made an announcement today. We are announcing that we believe we are on track to deliver Windows Vista worldwide on schedule. Secondly, we are going to be releasing Windows Vista in Europe and in Korea following constructive dialogue with the competition authorities there.

I have with me Brad Smith, who is Senior Vice President and General Counsel for Microsoft. He will make a few comments, and then answer any questions that you have. We recognize that you are on very tight deadlines, and the time is quite late over in Europe, so we wanted to organize this call to give you the opportunity to ask questions and get answers very rapidly.

If you have additional questions or if you need follow up, please feel free to contact us via Tom Brookes.

Brad Smith: Thanks to all of you for joining; I think the last time we all talked was in July, when the news was not so positive from our perspective, so it is very nice to have the opportunity to talk on a good news day like today.

You have obviously seen our announcement; Mark has just summarized it. Let me add some additional information and context, and I will then turn to your questions. Obviously, we are confirming that we continue to be on track to deliver Windows Vista for worldwide availability as we have indicated. Our plan is to provide this to volume license business customers next month, in November, and then provide it on a worldwide basis for general availability in January.

The very good news today is that following the conversations and very constructive dialogue with competition authorities around the world, we are able to confirm that Windows Vista will be available on a worldwide basis, including in the European Economic Area and in Korea. You all know that there have been significant competition discussions with the governmental authorities in each of these places. Let me first talk a little about Europe, then I will talk shortly about Korea, and finally I will put it all in a broader context of worldwide issues in which we have been engaged.

Dialogue with European Commission

Turning to Europe, as you all know, Commissioner Kroes provided initial guidance to Microsoft in March, identifying five areas of concern about Windows Vista. We took steps in the spring and summer to address those areas, by agreeing to make a number of changes to Windows Vista. We provided information in April and May to the Commission about those changes. The Commission in July sought substantial additional factual information from Microsoft, as I believe most of you know. The Commission services sent us a letter requesting information in response to 79 questions. We had a good conversation with Commission officials in July and submitted all that information in August.

After reviewing that information, the Commission provided Microsoft with additional guidance in September. Specifically the Commission advised Microsoft that we should make changes in three additional areas of the product. I will talk about each of these three in a moment. There ensued a constructive dialogue and a very productive set of conversations between people from Microsoft and the Commission. Following that conversation, Microsoft agreed to make each of the changes that the Commission advised.

Having made each of these changes, the company and Steve Ballmer [Microsoft CEO] felt comfortable moving forward and felt confident that we are in compliance with our EU competition law obligations. He and Commissioner Kroes had a conversation yesterday, in which Steve confirmed that we would make Windows Vista available in Europe.

I should underscore that we understand and appreciate that the Commission does not give green lights to new products in advance. We did not ask for a green light, and we appreciate that under competition law rules in Europe, it is a company’s obligation – and the company’s obligation alone – to ensure that it is in compliance with EU competition law. Having received guidance from the Commission, having had a constructive dialogue, and having made each of the changes we were advised to make, we feel confident that we can move forward in compliance with EU law.

Amendments to Windows Vista Search Features

Let me talk for a moment about the three areas that we were advised to address in September and what we did. The first area related to search. The Commission advised us to make changes in the upgrade process for users moving from Windows XP and Internet Explorer 6 to Internet Explorer 7. We agreed to make these changes. These changes ensure that Windows Vista puts all Internet search services on the same level playing field, so that even when users upgrade from an earlier version of Windows, they will select the search service of their choice. We were therefore able to address the search issue.

XML Paper Specification File Format

The second issue relates to the new file format that we have created for Windows Vista and in Microsoft Office for fixed document formats. This is the XML Paper Specification (XPS) file format, as those of you who have followed this are aware. This is a new format that competes with Adobe’s PDF format. The Commission gave us guidance on this issue. It advised us that it wanted us to submit this new specification to a standards organization. We have agreed to do so. We will move forward to submit the XPS format to an international standards association, and we will be doing that shortly. The Commission also advised that we should make certain changes to the licensing terms on which we make this specification available for other software developers to use in their products. We agreed to make these changes as well.

Amendments to Security Features

Finally, the third issue that the Commission advised we should address relates to computer security. The Commission raised two issues regarding security. The first relates to Windows Security Center and the sending of alerts to computer users by Windows Security Center when there is an alternative or competing security centre also installed on a PC. Following some very constructive conversations, we developed a new engineering approach and have created a new Application Programming Interface (API). With this new API, Windows Security Center will not send an alert to a computer user when there is an alternative security console installed on a PC, and when that security console is sending that same alert itself.

We concluded that this is a good approach that both ensures broad competitive opportunities for competing security centers, and maintains the highest level of security for computer users. What we did not want to see happen is the scenario in which there may be a problem with the computer, but the user gets no alert at all. This ensures that users will definitely be informed when there is a problem with their PC.

The other security issue that the Commission raised with us related to a feature called PatchGuard, which is in the 64-bit version and only this version of Windows Vista. This is a new technology that Microsoft has created to ensure that the kernel in the operating system remains secure and the code in the kernel is not changed.

Some security vendors expressed some concerns to the Commission, and to us, that they had previously used access to the kernel to facilitate features in their own product and that they would no longer be able to do so. We were concerned that it would be a mistake for the future of computers if PatchGuard were to be removed or eliminated. We devised a new engineering approach that will create and extend new kernel level APIs so that PatchGuard will be retained, the security of the kernel will be protected, and yet security vendors will have an opportunity to meet their needs through these kernel level API extensions. We felt that this was again the right kind of solution that meets the needs and obligations that we have under competition law, whilst also meeting the needs of computer users around the world.

Summary of Windows Vista in Europe

Based on this discussion, we agreed to make these changes in Windows Vista on a worldwide basis, and we committed to the Commission that we would retain these changes in Windows Vista regardless of the outcome of the case currently pending before the Court of First Instance.

To summarize the situation in Europe, I would say the following. We are gratified that we were able to have this type of constructive dialogue with the European Commission. The Commission gave us clear guidance, we made each of the changes we were advised to make, and we now believe we can move forward. We understand and appreciate completely that the Commission does not give green lights to new products, and that the obligation to ensure compliance with EU competition law is ours and ours alone. Based on the guidance that we received, the constructive dialogue that ensued, and the changes that we have made to the product, we now believe we can go forward with confidence that we are in compliance with EU competition law.

Windows Vista in Korea

Much more briefly on Korea, we also have a decision from the Korea Fair Trade Commission (KFTC) that we have a duty to comply with. Like the European Commission’s decision of 2004, this decision applies to Windows Vista. We have had a very constructive set of discussions with the KFTC over the last two months. We are under an obligation to develop and release a version of Windows Vista that is unique to the rules that now apply in the Korean market place. We have had discussions with the Korea Fair Trade Commission (KFTC) about the specific design issues for Windows Vista, based on which we believe that we are in a position to move forward and ensure that Windows Vista will be available in Korea at the same time as everywhere else.

In conclusion, Windows Vista is probably one of the most heavily scrutinized products in the history of technology; it is certainly the most heavily scrutinized product in the history of information technology.

We have had a two-year process of close discussions with over 20 government agencies in three continents.

It required that we take new steps as a company to share information about our design decisions, well in advance of the completion of the product.

We have been engaged in that process for over two years, which involved the Department of Justice and attorneys general in the U.S., the European Commission, the KFTC and other agencies in Europe and Asia.

Today marks an important milestone in that process, which has worked well in enabling competition law authorities to provide us with the kind of feedback that we have needed and the guidance required to create a product of this complexity.

It is a process that has enabled us to fulfill our obligations under competition law, while also meeting the needs of computer users.

It is a process that we want to build on for the future. We come out of this process having adapted and strengthened our ability to work with governments around the world, even in a period of legal uncertainty, when cases are pending before courts.

It is the type of very constructive process that will and should continue in the future, and we are certainly committed, as a company, to continuing this kind of dialogue as we move forward.

QUESTION: I would like some further details on the security changes. You said that there was an alert to users if there is an alternative security centre functioning. Could you explain a little further how that works? I am confused as to whether or not this means that there is an automatic override of the alternative security center, which would be of concern to Symantec.

Another issue raised by Symantec was the opening page of Vista; it mentioned that there was a link to your OneCare product and felt that this was an abuse of your dominant position.

You skipped over the issue of Korea quite quickly; what exactly is this unique solution for Korea?

BRAD SMITH: In terms of the alerts, let me give you some context. Anyone who has used Windows will be familiar with the process of receiving a message in the lower right-hand corner of their screen. In terms of the way Windows Security Center and many alternative security consoles work, if you are using a PC at home to play games, for example, you may turn off your firewall. Once you have finished, the security console wants to let you know that your firewall has been turned off. Alternatively, your anti-virus subscription may have expired, or you may have accidentally turned off your anti-spyware.

Windows Security Center is set up so that Windows Vista – and Windows XP, in many similar situations – will alert a computer user if there is a security problem on their PC, such as the firewall being turned off. When you buy a product like Norton 2007 from Symantec, or an anti-virus product from any other vendor, they may have their own security console and may want to send an alert if your firewall is turned off, for example.

The question was: who is going to send alerts and would Windows Security Center send an alert, even if there was an alternative security console doing so? The goal, from an engineering perspective, and in terms of the discussion we had with the European Commission, was to ensure that competition law obligations were met and that users would be well-informed if they had a problem like this with their PC.

We created a new API in Windows Security Center, so that if a competing security console is installed on a machine and that console is going to send an alert, it can do so through this interface, saying “I will be sending alerts about the firewall”. Having received that message through this interface, Windows Security Center will not send that alert, relying on the alternative security console to do so instead.

We have created in this interface so that, if the user uninstalls the second console, for example, or the second console decides that it is no longer going to send those alerts, Windows Security Center will re-start. That means that users will not receive duplicate alerts, but that the alternative console can send the alert instead. However, from our perspective, it also means that we know that users will receive at least one alert, which was very important to us. We did not want to be in a situation where users were not informed of any security problem with their PC.

The link question that you mentioned is not an issue on which the Commission was giving us guidance as a change that we needed to make in September. We did, nonetheless, decide to make a change to address the point that had been brought to our attention by Symantec. What we have added to the feature in Windows Vista called the Welcome Center is a link to alternative security offerings as well. There will be a link to Microsoft’s security information and another link, right next to it, to the security offerings of other vendors. I believe that that is the best way to provide computer users with information about security while also promoting broad competition.

I would also note that the link that we have created to our offerings is an optional link, and any PC manufacturer can delete it if they desire. In fact, if Symantec or anyone else wants to negotiate an exclusive agreement with an original equipment manufacturer (OEM) or PC manufacturer to replace both of those links and install, in their place, a link only to their own offering, they are free to do so.

With respect to Korea, the Korean decision that came out late last year required us to create a version of Windows that is unique to Korea. This relates to both Media Player issues that are similar to those that we have had in Europe, and to issues in Windows Messenger, as well as some other issues that are unique to Korea. We have been able to have a good discussion with the KFTC about which of the Windows Vista versions this will apply to, and how it will apply to each version, so that we know what we are supposed to design, and how. Those discussions have moved forward and reached a point where we felt, with confidence, that we can now meet those obligations in a timely way, and Windows Vista will be available in Korea in January – the same time that it is available everywhere else in the world.

QUESTION: Could you put into context the significance of the changes that Microsoft is making to Vista? Is Microsoft now changing its strategy of bundling?

Second, are you hoping that the company’s concessions and process with Vista will, in any way, be considered by the judge here in Europe on the original case before the Court of First Instance?

Third, can you give us any update on the status of possible further fines against Microsoft that the Commissioner had threatened? Up to $3 million a day, starting from 31 July, would be about $230 million today; could you update us on where that stands?

BRAD SMITH: With respect to your second question, I do not think that the steps we have taken today relate to anyone trying to think about the case in Luxembourg. That case has been moving forward; it was argued before the Court in April, and the facts have all been put to the Court. Indeed, none of the changes that we are making today relate to Windows Media Player, which is the issue before the Court in that case.

By way of answering your other questions, I would talk about the importance of this dialogue in the context of our broader relationship with the European Commission. I believe that the changes that we are making today are important, in that they both ensure that we comply with our competition law obligations in Europe and, quite constructively, that we do so in a way that meets the needs of computer users.

I think that this kind of dialogue was constructive in many ways, one of the most important of which is the fact that this kind of conversation that we had really made it possible to identify steps that would meet competition law concerns without undermining, for example, the security needs of computer users. If anything, it really illustrates what can be accomplished through good conversation. I think that is an important and helpful step for everyone.

Obviously, there are other issues that the Commission continues to review: we have continuing legal obligations in other areas under the 2004 decision and we are continuing to work towards meeting our obligations, wherever we need to. I feel good about the work that we have done and confident that we are in compliance with the 2004 decision. One always needs to take things on a step-by-step basis. Whenever we are able to make progress in one area, it is not unhelpful to the opportunities and needs to make progress in other areas too.

I would underscore the priority and importance that we, as a company, attach to having a good relationship with the European Commission; it is always very challenging to be in litigation and, at the same time, to work together constructively. It is never easy, whether it involves two companies or any other kind of situation. The fact that we were able to have this kind of constructive dialogue with the Commission on Windows Vista is, among other things, testament to the professionalism of everyone involved, on all sides, in the conversations that have taken place.

QUESTION: You said in the past that the Commission has not really given you a clear sense of what it has wanted; I am referring mainly to the 2004 decision here. Do you have the sense that you are now being given clear guidance around what is required of Vista? Are there any other issues that you did not agree on, or is it the case that these three main areas are their key concerns and that you have managed to deal with them?

BRAD SMITH: We received guidance from the Commission on Windows Vista that was very clear and constructive. It provided us with the clarity that we needed in order to move forward and make design decisions. Where there were questions or areas of uncertainty, we were able to have the type of constructive dialogue that eliminated that uncertainty, and that was extremely helpful. In fact, we made changes in each of the areas that the Commission identified, so the discussion was very constructive. The Commission was very clear, firm and emphatic about the changes that it wanted to see made, and we made each of those changes.

We understand that, having had this kind of conversation, it remains our obligation – and ours alone – to be in compliance. It is not a responsibility that is different from that; the Commission does not give “green lights”, but it is much easier to ensure that one obeys the speed limit when one knows what the speed limit is, and the guidance that we received provided us with the kind of clarity that we needed.

MARK MURRAY: Thank you very much for joining us at such short notice. If you have any follow-up questions, please feel free to call Tom Brookes in Brussels, and we will try to answer your questions as quickly as possible.