Speech Transcript – Craig Mundie, The New York University Stern School of Business

Prepared Text of Remarks by Craig Mundie, Microsoft Senior Vice President
The Commercial Software Model
The New York University Stern School of Business
May 3, 2001

It has long been said that change is the only constant in the technology industry. In the past 20 years the velocity of that change has accelerated at a seemingly exponential rate, serving constantly as an engine of growth for the global economy.

Yet during the last year, the U.S. economy has hit what could be regarded as its most substantial speed bump of the past two decades. Illustrated most starkly by the declining valuation of the NASDAQ, weve witnessed a notable decline in consumer confidence that has people wondering whether were at a brief respite or whether weve reached the end of an economic era.

At Microsoft we believe that the personal information technology revolution that began in the early 1980s is far from over. It probably has at least two more decades to go. But its also important that we learn from the lessons of the past year and apply them in order to make the most of the potential that lies ahead.

One lesson is that we should keep things in context. Every big phase of economic expansion has its share of downturns, and new technological advances frequently bring with them a share of over-exuberance. The recent and substantial technology investment downturn mirrors similar episodes that affected railroads, steel, automobiles and radio. In this context, its not surprising that, as early as 1995, Bill Gates wrote in his book about what he called the
“Internet gold rush”
and predicted both enormous long-term advances and substantial short-term setbacks, saying
“Gold rushes tend to encourage impetuous investments. A few will pay off, but when the frenzy is behind us, we will look back incredulously at the wreckage of failed ventures and wonder, Who funded these companies? What was going on in their minds? Was that just mania at work?”

But there is a broader lesson as well companies and investors need to focus on business models that can be sustainable over the long term in the real world economy. A common trait of many of the companies that failed is that they gave away for free or at a loss the very thing they produced that was of greatest value in the hope that somehow theyd make money selling something else. The Internet, for example, was full of sites producing content for free, in the hope that somehow theyd generate revenue from sources that never materialized, whether it was advertising, subscriptions, or a wing and a prayer. As weve learned or really re-learned one cant build a business or our economic future on that type of flimsy foundation.

Contrast this recent experience with the two decades of economic success that preceded it. The global economy grew in an unprecedented way in no small measure because of a generation of new companies, of which Microsoft was fortunate to be one. Many or even most of these companies invested heavily in research and development and sold their principal products at prices that covered their costs and generated profits that they reinvested in further research and development.

This research and development model, in turn, was almost always based on the importance of intellectual property rights. Whether copyrights, patents or trade secrets, it was this foundation in law that made it possible for companies to raise capital, take risks, focus on the long term, and create sustainable business models.

Despite the demonstrable success of the computing industry and the IP-based economy, and the clear failure of newer firms that gave away products for free, its notable that in the past year there has been a broader discussion about whether the ingredients that delivered longstanding economic success can continue to do so. In part this discussion has focused on whether the personal computer will continue to provide a sustainable technological foundation for economic growth. And in part this has focused on whether IP protection as we have known it whether for music, software, or other products should continue to be a fundamental engine of economic growth.

The questions to be raised are twofold:

  1. Can the personal information technology continue to drive broad economic growth?

  2. Should an information-based economy protect the intellectual property assets that are driving its growth?

In thinking about the technology foundation we need, its important to recognize that the popular use of the Internet is still less than 10 years old, and is already moving into its third significant phase.

Phase 1: In the early 90s it was all about static information. The nascent World Wide Web was catapulted to the world stage as millions of individuals and businesses began to tap the potential of the medium.

Phase 2: The late 90s saw the birth of the online transaction and the promise of Internet-based business models. Both were about connectivity, but now the static distribution of information was replaced by business-to-customer or business-to-business transactions. For the general public, Amazon.com came to personify the Internet transaction. Revenue models based on advertising sales vs. product sales came into vogue and Yahoo became the poster child for this model. The interesting part of this model is the shift of focus away from the technology IP to content IP as the revenue engine for a company.

Phase 3 is what is being worked on now. Its all about connecting the currently separate complex systems of information and transactions and bringing that power to the individual in a readily accessible format on a variety of devices.

These new technologies will be able to identify the relationships between disparate information sources and transactional environments. The individual may then cull relevant data and execute the necessary transactions to complete a task or make strategic decisions. An example of this would be to have a single process for identifying physicians covered by your healthcare plan, comparing physical locations of clinics to mass transit schedules and routes, scheduling the appointment and taking care of the co-pay all at once. Most importantly, this can be done any time, any place and on any device.

There are challenges to the success of Phase 3 becoming a reality.

The increasing numbers of failures in the .com space show a flaw in many of the existing Internet business models.

Advertising as the primary revenue stream

A heavy investment in research and development is going to be required in order for businesses and individuals to see the benefits of phase 3.

The technology industry has to prove its commitment to privacy and security in order to encourage user acceptance of the technologies. Furthermore, the next phase needs to be presented in a simple and compelling fashion so that individuals and businesses may make use of them easily.

The paradigm shift that is at the core of phase three is the focus of the Microsoft .NET strategy. .NET is a set of Web services that are user-centric rather than device-centric. This is a shift in focus from individual Web sites or devices to new constellations of computers, devices, and services that work together to deliver broader, richer solutions. People will have control over how, when and what information is delivered to them. Computers, devices and services will be able to collaborate directly with each other, and businesses will be able to offer their products and services in a way that lets customers embed them in their usage of the Web at their discretion.

  1. : a strong support community of developers

  2. : promote collaboration and interoperability while supporting innovation and healthy competition

  3. : promotes the growth of a profitable business

  4. : level of research and development investment drives resources for future innovation

  5. : provides product and source access without jeopardizing the intellectual property rights of those who create or use the software

Microsoft has fostered the worlds largest community of software developers for well over a decade. Today, our developer network (MSDN) works with a community of 5 million developers. The element of the commercial software model for Phase 3 that we need to improve is that of our licensing model. Microsoft is expanding its licensing model to include our
“Shared Source Philosophy.”

Shared Source is a balanced approach that allows us to share source code with customers and partners while maintaining the intellectual property needed to support a strong software business. Shared Source represents a framework of business value, technical innovation and licensing terms. It covers a spectrum of accessibility that is manifest in the variety of source licensing programs offered by Microsoft.

  • The principles of the Shared Source Philosophy are:

  • Helping customers and partners to be successful through source access programs

  • Building the development community and offering them the tools to produce great software

  • Improving the feedback process in order to create better products for Microsofts customers and partners

  • Maintaining the integrity of our customers environments

  • Increasing educational access in order to get the technology into the hands of universities worldwide, and to seed the future of a strong technology industry

  • Protecting software intellectual property based on the firm belief that software offers value as the basis of a successful business.

  • Some examples of Shared Source already being implemented at Microsoft:

  • Research Source Licensing: For nearly a decade Microsoft Research has licensed Windows source code to more than 100 academic institutions in 23 countries.

  • Enterprise Source Licensing Program: Source code for Windows 2000 and subsequent releases of Windows is available for licensing at no charge to over 1,000 enterprise customers in the United States. Today we are announcing a pilot program expanding the ESLP to 12 additional countries.

  • ISV Source Licensing: we are developing a program for licensing Windows source code to top tier ISVs for development and support purposes

  • OEM Source Licensing: Windows source code has been licensed for years to leading OEMs to assist in the development and support of their consumer and server products

  • Windows CE source code access: We are licensing Windows CE source code through Platform Builder 3.0 (generally available to all developers). Microsoft will be broadening and adding to the community support mechanisms through the Platform Builder Program. In the second half of this year we will offer academic site licenses for CE source code.

  • Additionally, we have announced an expanded level of CE source access to, (i) our leading silicon vendor partners via the Windows Embedded Strategic Silicon Alliance program, and (ii) our leading system integrator partners via the Innovation Alliance Program.

  • Sample code: Over the years Microsoft has made millions of lines of source code freely available to developers through resources such as SDKs, DDKs, and MSDN.

  • We have announced that the specifications for the .NET Framework have been submitted to the ECMA standards body, enabling others to implement and evolve this technology in a platform-independent manner so that it is can be rapidly and widely adopted on an industry-wide basis.

We emphatically remain committed to a model that protects the intellectual property rights in software and ensures the continued vitality of an independent software sector that generates revenue and will sustain ongoing research and development.

The commercial software model is just one model being utilized in the software industry today. It is important to take into account the Open Source Software movement as an example of an alternative model.

The phrase
“open source software,”
or OSS, is often used as an umbrella term for a collection of product development, distribution and licensing practices, many of which have existed individually since the early days of computing. There are actually a number of different approaches within this community, but the common traits are providing people with access to source code and allowing others to modify and redistribute that code.

As a result of Microsofts statement of position today, many people will attempt to say that Shared Source is Microsofts failed attempt at being an Open Source Company. This could not be a more incorrect statement. Shared Source is Open Source. We recognize that OSS has some benefits, such as the fostering of community, improved feedback and augmented debugging. We are always looking for ways to improve our products and make our customers more successful, and to that end we have incorporated these positive OSS elements in Shared Source. But there are significant drawbacks to OSS as well.

The OSS development model leads to a strong possibility of unhealthy
of a code base, resulting in the development of multiple incompatible versions of programs, weakened interoperability, product instability, and hindering businesses ability to strategically plan for the future. Furthermore, it has inherent security risks and can force intellectual property into the public domain.

Some of the most successful OSS technology is licensed under the GNU General Public License or GPL. The GPL mandates that any software that incorporates source code already licensed under the GPL will itself become subject to the GPL. When the resulting software product is distributed, its creator must make the entire source code base freely available to everyone, at no additional charge. This viral aspect of the GPL poses a threat to the intellectual property of any organization making use of it. It also fundamentally undermines the independent commercial software sector because it effectively makes it impossible to distribute software on a basis where recipients pay for the product rather than just the cost of distribution.

In this sense, open source software based on the GPL mirrors the .com business models that proved the least successful during the past year. They ask software developers to give away for free the very thing they create that is of greatest value in the hope that somehow theyll make money selling something else. In effect, it puts at risk the continued vitality of the independent software sector. The business model for OSS may well be attractive for software as an adjunct to hardware the model of the 60s and 70s or for service businesses that do not generate the revenue needed for major investments in technology. But as history has shown, while this type of model may have a place, it isnt successful in building a mass market and making powerful, easy-to-use software broadly accessible to consumers.

In contrast, two decades of experience have shown that an economic model that protects intellectual property and a business model that recoups research and development costs have shown repeatedly that they can create impressive economic benefits and distribute them very broadly.

Finally, the fact that we believe strongly in the value of IP protection doesnt mean that we discount the importance of contributing to and supporting the public domain of knowledge as well. We believe that interaction between the public domain and the IP-based sector needs to be based on mutual responsibility and respect.

There is an important and longstanding tradition for the public domain of knowledge, or
“intellectual commons.”
This is reflected in many ways, including federal support for basic research, the limitations on IP rights reflected in the law and, more recently, the broad practice of contributing technology to public standards groups for the continued development of the Internet. We support this and want to continue to be a constructive and responsible participant in this community, including making contributions to public standards. There is an equally important tradition of commercial companies having the opportunity to benefit from and apply this public knowledge, including by developing commercial products that are protected by IP rights. There are many examples of this, including the many products that grew from research in the space program and the advances in speech recognition technology that followed work done at pre-eminent institutions such as Carnegie Mellon.

The GPL asserts that any product derived from source code licensed under it becomes subject to the GPL itself. When the resulting software product is distributed, the creator must make all of the source code available, at no additional charge. This effectively makes it impossible for commercial software companies to include source code that is licensed under the GPL into their products, since by doing so, they are constrained to give away the fruits of their labor. As we think about technology, IP rights, and the public sector of knowledge, we need an intellectual model that encourages interaction, not a model that drives them apart. We believe that a shared source model, coupled with continuing contributions to public standards, provides a path that is preferable to the open source approach founded on the GPL.

Collectively we need to seize the opportunity to make the most of the next two decades of potential economic growth. This requires the proper combination of continuity and change. It means keeping the model of personal information technology but adapting it to the needs of the next generation of technology, as we are doing with .NET. It means promoting a sharing of knowledge, through source code and broader interaction, while respecting the importance of intellectual property rights. If we combine these approaches in the right doses, there is cause for great optimism about the economic road ahead.

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