UPSIDE SUMMIT ’98
MICROSOFT CHIEF OPERATING OFFICER BOB HERBOLD
SEPTEMBER 16, 1998
MR. BRANDT:Thank you very much, Bob.
Thank you very much for that talk.It sounded to me like an excellent preview of some of the things that you might be saying before the Justice Department, in your upcoming testimony.You gave a couple of figures, I’d like to ask you a couple of questions first.You gave some figures on the health of the software industry in particular.We heard from Roberta Katz earlier today, who gave very different figures, claiming that Microsoft accounts for about 25 percent of the revenues of the entire software industry.I believe she may have been referring to PC software.And that Microsoft has half the combined market cap of the other 99 top software companies.What is your comment on that, although there are a lot of companies getting started.Is Microsoft simply so dominant that it is tough to compete?
MR. HERBOLD:Well, in some of these areas of business, as I alluded to on my slide, there is no doubt that in some of them we’ve been very successful, and some of them we find more challenging.But, none of us collectively should be embarrassed when we run into a situation where we think we’ve got a great product, and in fact, the marketplace confirms that.That’s what leads to this overall notion of a fact that you can’t argue.This is a very healthy industry, and the primary reason why is that consumers are winning.And the primary reason why they’re winning is an incredible amount of innovation is being brought to this marketplace.
So yes, Microsoft might be strong here, not so strong there, may have a large cap while other companies may not have as large a cap.We also know that from history that moves around a lot.So let’s keep focused on the key issue, which is we’ve got a great industry here.Consumers are winning.The innovation rate is phenomenal.
MR. BRANDT:There was this issue of where Microsoft leads is a very critical one.One of the questions that has been raised by some of Microsoft’s opponents is that, yes, you may not lead in every industry, and perhaps there is a low barrier to entry.But, you absolutely dominate the PC operating system business, in which there is now a very high barrier to entry, and that gives you the leverage to subsequently dominate other industries.Isn’t that
— isn’t there some truth to that?
MR. HERBOLD:Well, I don’t believe so, to tell you the truth.Just by looking at these companies, the number of companies that have emerged, the great capabilities that people have to load on their PC, their ability to do things with their PC.The important thing is that choice is alive and well.When a person buys a personal computer, they turn that machine on, and they have the ability to do whatever they want.
For example, in regard to browsing technology, we know from our market research, which is publicly available, that most people get in there and download new kinds of browsers, experiment, to the extent that if you take a sample, generally, about 12 percent of people have the original browser that was loaded on their machine, and the other 88 percent, in fact, have changed.So you’ve got choice being alive and well.They can download all kinds of new capabilities, and they can do things that fit their lifestyle, and what they want to do
So we think, once again, that all points back to why this industry is so healthy, because innovation is so alive and well.
MR. BRANDT: I’d like to ask, because a lot of this comes down
— your dispute with the Justice Department comes down a lot to a matter of semantics.You talk about
you talked in your speech about the right to expand and enhance your product?
MR. HERBOLD: Right.
MR. BRANDT: The Justice Department describes it as tying products together.
MR. HERBOLD: Yes.
MR. BRANDT: I’d like to ask the audience what they think, if Microsoft adds browser capability into an operating system, is that enhancing a product, or is that tying two products together?Give us a second to get that set up and we’ll
— use one as the response is enhance, and two the response would be tying.
I’d also like to ask you, while we’re getting that set up, you talk about the consumer’s right to choice.I think one of the big criticisms that has come up from the Justice Department is the amount of influence that Microsoft has over the PC makers and the ISPs.In other words, do you really allow the consumer to have a choice, if you have the ability to tell the PC makers what it is they are going to offer to the consumers?
MR. HERBOLD: Right.Well, I’d like to respond to that, because our contracts with the hardware manufacturers are very clear.They load Windows onto that system, but the remaining part of that desktop, which appears the very first time that PC is turned on, is available to that hardware vendor.Some of them decide to load other browsing capabilities.Some of them decide to load other services, and they are perfectly free to do that, and have been free to do that.
Secondly, once that consumer turns it on, they can hit delete on any of the things they see on that screen.They can go to the Internet and grab new things that they’re interested in.And so that’s why we strongly believe that choice is alive and well.
MR. BRANDT: All right, let’s see if we can go to the Iris question, then.If Microsoft adds browsing technology to its operating system, is that enhancing the product, or tying to products together?We’ll give you just a couple of seconds to answer that.And Bob, we’ll give you the results.What have we got?
Enhance 41 percent, and tying two products together 59 percent.So there’s a slight majority against you on that one.
MR. HERBOLD: Okay.
MR. BRANDT: I also wanted to note that we had two questions earlier, when Roberta Katz was speaking.
MR. HERBOLD: I’m glad the appeals judges didn’t agree with the votes.
MR. BRANDT: Did Microsoft compete unfairly with Netscape, 63 percent of our audience said yes.Then we asked them, would Netscape have done the same thing if it could have, and 86 percent of the audience said yes.I thought you might be interested in that statistic.
MR. HERBOLD: Yes.
MR. BRANDT: I’d like to hear a couple of questions from the audience.Do we have somebody ready with a question?Right back here.
QUESTION: You speak of the right to incorporate different features into the operating system and enhance it, more specifically for the users benefit.How would it not benefit me to have a word processor or spreadsheet or database as part of my operating system, and not have to buy another piece of software?
MR. HERBOLD: Well, the test that the judges used, relative to the court of appeals decision was, look at it with and look at it without, and where are the advantages.There are some aspects of an operating system, like browsing, that makes it far, far easier for independent software vendors if that functionality is right in the operating system.So that they can assume those capabilities are there, and a large number of independent software vendors can take advantage of it.
So in the case of browsing technologies, having that integrated right into the operating system enables a software vendor to already assume all of that is there, and not to have to guess what browsing application has been loaded on the machine, and consequently build their application so that it assumes it’s there, they don’t have to carry the code, but they can build in great functionality into their tool.
That’s what the appeals court judges liked about integrating that kind of capability.That’s the test that should be held up for any device, be it a word processor or whatever.Typically, though it’s core functionality that applies to many, many situations.So that multimedia capabilities, for example, a lot of software vendors came to us indicating, why don’t you just put it in the operating system.File management capabilities, why don’t you just build it into the operating system, everybody needs that kind of thing.So actually, the test in regard to what makes sense usually is pretty straightforward, namely, does it really advantage the consumer by making the life of the ISV, the independent software vendor, much, much easier, so that they can build in capabilities.We like that test.We’re proud of that Court of Appeals decision.
MR. BRANDT: All right.Now, what if the
— if these capabilities are integrated into the operating system, then Microsoft, by default, becomes about the only company that can really innovate in those areas.It becomes difficult for a competitor to say, I’ve got a better sound technology, or I’ve got a better graphics technology.Is there a way to deal with that issue, do competitors have a chance to
MR. HERBOLD: Sure, I mean, there are tons of companies in this industry that constantly are innovating new capabilities into their particular tools.If you look at what has gone on in terms of virus protection, the amount of creativity that goes on regularly in that business has enabled some very successful companies, small companies, but very successful, to constantly innovate, constantly remain healthy, and constantly play a valuable role in terms of stand-alone products that people want to buy, to load on their PC.
There are other parts of things that are immediately clear that all the independent software vendors are going to want to use that, and it gets integrated into the operating system.So that’s why it’s so important to step back and say, okay, what’s going on in this industry.You know, the number of software companies doubling since 1990, the number of employees doubling since 1990, this is an industry that is incredibly healthy, primarily because the consumer is winning, and they’re winning because of the incredible innovation, this industry is bringing to them, so they can do exciting things.We can’t lose sight of that very important observation.
MR. BRANDT: Okay.We have another question back here.
QUESTION: Ernest Miller from Yale Law School.You speak a lot about consumer
— advantage to the consumer through innovation.Some people have argued that the best way to do that would be to free code, particularly operating system code, and other systems.You didn’t mention that.What is Microsoft’s position, what do you think the future is of the free code movement?
MR. HERBOLD: Well, from the standpoint of most companies, I don’t care what industry they are in, they have to take a technology approach to how they want to basically architect their products.And then they need to be able to constantly change that to meet the needs of consumers.We believe, and many companies in this industry believe, that the best way to do that is to constantly have that code available to you, with your ability to constantly change it, and not worry about the fact that it’s out there in the public, and have they changed it or not, and what is Windows, and the like, be that the product you may be discussing.And so it creates a real dilemma in regard to how you make sure what it is that people have on their machines, how you know you can integrate new capabilities into it that people really want you to do.
So most companies end up saying, okay, we have to be the owners of our products.We have to make it clear how you interface with these products easily, so many companies, literally thousands of companies, can build their business by connecting easily to these products.And that’s what we try to do at Microsoft, and that’s the way most of the people in this industry operate.And it leads to a very healthy business, it leads to a situation where consumers win, they don’t have to worry about owning code themselves, and deciding what version they have, and what to do with it.So our feedback from customers says, make it super, super simple.All I want to know is what are the capabilities you provide me.And once again, the important thing is that this industry seems to be delivering that.
MR. BRANDT: Okay.We’re going to have to
— I’m going to try to squeeze in one more question.We’re going to have to make it very brief.
QUESTION: One technology you have chosen not to bring into Windows NT is the incorporation of hard real time.Can you explain why you have chosen not to do that?
MR. HERBOLD: I’m sorry.I didn’t hear the question?
MR. BRANDT: You have chosen not to integrate hard real time into Windows NT.Can you explain why
MR. HERBOLD: There is a why.
— why you have chosen not to?
MR. HERBOLD: Well, that’s based on feedback from customers in regard to its value, how important that is, across our broad set of customers, how technologically difficult the task is.We have a lot of features that people ask us about, and we consider, and we wish we could do everything.We have to make decisions in order to get on, to get products out the door.That particular one, I personally am not familiar with, so I really shouldn’t go any further in trying to answer the question, except to give you those broad principles.
MR. BRANDT: All right, Bob, thank you very much for your time.
MR. HERBOLD: Thank you.
(End of presentation.)