Brad Smith: Microsoft News Teleconference with International Journalists Regarding European Court of First Instance Order On Interim Measures

DIRK DELMARTINO: Thank you very much. Good afternoon, everybody, or good morning to the people in the U.S., good evening in Asia. Thanks for joining us for this international media call. My name is Dirk Delmartino. I’m responsible for Microsoft PR in Brussels.

We wanted to offer you some comments on today’s order on interim measures from the Court of First Instance in Luxembourg and hope to answer any questions you might have.

With us here is Brad Smith. He is senior vice president and general counsel for Microsoft Corp. After Brad’s opening remarks, the operators will give some instructions and open for Q & A.

So, Brad, if you will?

BRAD SMITH: Great. Well, thank you, everybody, for joining us on this call, appreciate the opportunity to talk some about the decision. I’m sure you’ve all had an opportunity to read the press release and perhaps to start reading every part of the decision.

The decision speaks for itself, I think that is clear. Obviously the court rejected Microsoft’s motion for interim measures, and obviously the basis for the court’s decision to do that was its conclusion that Microsoft would not suffer harm from these remedies that would be irreparable. Specifically, the court obviously concluded that if we win the case on the merits at the end of the day we will have the ability to repair whatever harm has been suffered.

There are a couple aspects worth noting with respect to that. First, the court noted that it would be appropriate for us to have safeguards in place with respect to the compulsory licensing of our communications protocols. That’s helpful, I think, to the company. We’re studying that part of the decision carefully. We will certainly want to employ appropriate safeguards, as reflected in this decision, for the protection of our intellectual property rights. But that was a significant part of the court’s conclusion that any harm that we suffer as a result of that remedy could be repaired if we win at the end of the day.

Similarly, the court obviously concluded that any harm that we suffer as a result of offering an additional version of Windows in Europe can also be repaired if we win at the end of the day. The court recognized that we would be able to withdraw from the market this additional version if we win, and we could address whatever issues may arise in the interim through marketing and other measures.

Given that that is today’s decision, I think that the effect and the implications for Microsoft are really twofold, and they’re very clear in this situation. First and perhaps foremost, we have to do an excellent job of implementing and complying with the court’s order and we will do that. We are starting immediately to comply with the court’s order and with the Commission’s decision.

That really means two things. No. 1, we will activate later today a Web site that our competitors will be able to go to, to start getting information and start going through the process of licensing the communications protocols. We’re studying the decision carefully but we will have that Web site activated later today. As in the United States under the Consent Decree there, there will be particular steps the companies will go through. We’ve had over 20 companies license our communications protocols in the United States, so we’ve now established a fair degree of experience that we can learn from and will apply going forward in Europe.

Similarly, we will go forward immediately to continue and then complete the work needed to offer in Europe the additional version of Windows that we are required to provide. We have an agreed-upon timetable with the European Commission. Under that timetable, we will complete the final stages of testing and then this additional version of Windows will be made available to PC manufacturers in Europe in January, and it will make its way throughout the rest of the distribution channel so that we expect that resellers in Europe will have this version available to them by February.

I would note that we’ve had the opportunity over the last several months to have thorough discussions with the European Commission about the implementation plan for these remedies. We recognize that the Commission will want to continue to review this work as it reaches fruition. We respect that role. We’re committed to working in the most professional and constructive way possible with the Commission staff. I believe that our team and the Commission’s case team have had a very constructive dialogue these last several months and I would expect that the implementation of this will go forward in a very orderly and professional manner. We are absolutely committed to doing everything possible to comply with today’s order in every manner that we should.

We have an opportunity, as you know, to decide whether to appeal today’s decision to the European Court of Justice. It’s too early to know whether we will or we won’t appeal. We will have to study today’s decision and we’ll have to make a decision. Even if we appeal, we obviously need to start moving forward with compliance, and so I think compliance is our first order of business today.

Whether we appeal or not, obviously the case goes forward on the merits in terms of the litigation. And I think that there is substantial cause for optimism for us today in the court’s discussion of the merits of the case. While the court was not convinced obviously that we would suffer harm that is incapable of repair should we win, the court nonetheless recognized that we have a number of arguments that are important, that will need to be weighed seriously by the panel that will decide the merits, and could well enable us to win at the end of the judicial day.

I would point to a few of those in particular, starting with the Media Player side of the case. The court makes a number of important observations, in particular in paragraphs 400 through 403. For example, in paragraph 400, the court recognizes that there’s a complex question of whether the Commission may rely on the “probability that the market will tip as a ground for imposing a sanction in respect of tying practiced by a dominant undertaking where that conduct is not by nature likely to restrict competition,” and I think that is an important point that we have been making all along, that the practice at issue here, the integration of new technology into a consumer product, is not a practice that by its nature is likely to restrict competition.

That’s as the court recognizes, that there’s an important question in connection with the examination of Microsoft’s argument that the Commission should have given greater weight to the positive effects of the Windows operating system design concept. That’s in paragraph 401. That has been a fundamental part of our case, that the integration of these features creates new benefits for consumers, as well as many benefits for software developers.

Third, in paragraph 403, the court recognizes that the Commission’s analysis relating to the existence of indirect network effects is contradicted by the fact that content providers continue to have recourse to different formats, which is obviously a reference to media formats. And as the court continues, it says in that regard, it must be stated that the Commission has not disputed that this was the case, at least to a certain extent.

And then that’s followed in paragraph 403 where the court says that Microsoft’s argument that Windows and its media functionality do not constitute two distinct products for the purpose of the application of Article 82 in regard to tying and it said, “that that cannot in the interim measures proceeding be considered prima facie unfounded”, and the next part is particularly important I think, the court says, “regard being had in particular for the fact that for many years Microsoft and other manufacturers have integrated certain media functionalities in their client PC operating system.”

So when you put those four paragraphs together, even in the context of an interim measures case where the court tends to be rather circumspect, we do see this decision today recognizing that the practice that we have engaged in, integrating new features into our operating system, is something that we and other manufacturers have been doing for a long period of time, it is not eliminating the opportunity for content providers to choose competing media formats, there is a certain weight that needs to be addressed by the court as to the benefits created by our overall design concept and there’s a real question of whether it is therefore appropriate for the Commission to base a decision in this field on future speculation of a market tipping when the conduct is not by its nature likely to restrict competition.

So I think all of those factors give us cause for optimism. I’m not suggesting that victory is guaranteed for anyone, but there’s clearly cause for optimism as we see the litigation path moving forward.

There are similar points made with respect to the interoperability side of the case and I’ll probably save those for your questions, but you’ll also find specific parts of this decision where the court acknowledges the validity of our argument that there are important intellectual property rights that need to be considered, it’s unproven whether there’s any need for this technology or intellectual property rights among our competitors. These two are the types of arguments that if accepted by the court on the merits would enable Microsoft to win the case at the end of the day.

So as we [move] forward, in sum, we need to stay focused on two things. No. 1, do an excellent job of implementing and complying with today’s decision; we will do that. No. 2, do an excellent job in moving forward with the litigation, with the goal and the hope of persuading the court that at the end of the day on the merits this is a case that should come down on our side.

Well, let me stop there and I’d be happy to take your questions.

(Operator Direction.)

QUESTION: I was just wondering can you clarify that these are different protocols than those that are covered under the current Microsoft’s Communications Protocol Program and is it going to be a separate Web site from that?

BRAD SMITH: Good question. Some of the protocols are the same and some of the protocols are different. Specifically the Commission’s decision covers in part the same communications protocols that we have in our Windows client and that we have already offered for licensing in the United States. Those licenses are made available on a worldwide basis and, as I mentioned, over 20 companies have already entered into license agreements with us.

In addition, and this is probably the part that people will want to focus on more, the Commission’s decision also covers a new category of communications protocols. These are protocols in the Windows Server. And under the Commission’s decision, we are obligated to make those protocols available for license so that they can be implemented in competing server software.

I don’t know whether the new page is going to be sort of a sub-page of what we have; we’ll sort that out today before we activate this. We’ll certainly ensure that it’s very easy for people to access and get information about.

And I would generally expect that if there is interest among our competitors, one might expect them to pay more attention to the protocols that are new in terms of being made available and in contrast to the protocols that have already been made available over the last couple of years.

(Operator Direction.)

QUESTION: I would like to know how much the stripped down Windows without Media Player will cost.

BRAD SMITH: Well, the Commission’s decision specifically states that the version of Windows that has the Media Player code removed from it may be offered at the same price as the version of Windows that we offer today and so I would expect that will be the case, the pricing will be identical I would expect.

(Operator Direction.)

QUESTION: Hi. Just could you give us a little summary on sort of what the timing looks like going forward, sort of when you would make appeals or depending on whether you decided to make appeals, sort of what the roadmap looks like going out for the next several months or years?

BRAD SMITH: Sure. There are two distinct parts that you may want to consider. The first is any appeal from today’s decision. If there were to be an appeal, it would be to the president of the European Court of Justice and the appeal would have to be lodged in the next two months. We don’t yet know whether we will appeal. I don’t think it will take us two months to make that decision but I do think we should take enough time to really read the decision before making that decision ourselves and we’ll do that. If there were to be an appeal, then the timetable would be up to the court of justice to decide. So the first step is whether we will appeal and we’ll have to take some time to really study this and reflect on it.

Independent of whether there is an appeal, the case on the merits will go forward before the Court of First Instance. It is up to the Court of First Instance to set that timetable. So we don’t know for certain exactly what it will look like. We do know that there is a briefing schedule that’s already in place. That calls for the writing and submission of additional briefs between now and June 2005.

In most cases before the Court of First Instance there would tend to be perhaps another year or close to a year before a decision would come out on the merits of the case. Therefore, it’s possible that we might see the oral hearing in the fall or thereafter and then obviously one would get a decision some months after that.

But those are all decisions for the Court of First Instance to make, and I’m sure we and everybody else will work hard to meet whatever timetable they set. It does mean that the litigation path is going to continue for some extended period of time; even after a decision on the merits by the Court of First Instance, there can be an appeal on the merits to the European Court of Justice.

So this case may keep lawyers on all sides busy for months and some additional years before there’s a final resolution.

(Operator Direction.)

QUESTION: Hi. Yeah, I know you guys have addressed the financial issue of this with regards to any penalties and fines, but can you talk a little bit as to whether complying with this ruling, the financial impact it would have developing the additional software and then having that out in the market?

And you’ve also mentioned that you would be able to pull that new version from the market if the ruling is reversed. How would that work exactly? Would you just stop supporting it? Would there be some sort of shutoff thing in the software? Can you talk about that a little bit?

BRAD SMITH: Sure, all good questions. I mean, first, it’s probably helpful to focus on the number that tends to be the biggest is really the only number in the case and that is the fine, which is 497 million Euros. That amount was paid back in the spring and we did not seek a suspension of that part of the order. There’s really no basis for a suspension under European law. So that was already paid, it was reflected in our quarterly financial statements and today’s decision has no impact on that.

Second, there’s obviously the cost of development work to produce both this new version of Windows and to do the work to make the protocol specifications available. We never argued in the court case that that cost by itself constituted any type of irreparable harm, so that was not an issue in the case. A great deal of that work has already been completed.

Obviously we were not sitting on our hands waiting for today’s decision. We’ve had technical teams working very hard over a series of months now on all of those steps and there will be some additional work for the final stages of testing this additional version of Windows, but I think it’s fair to say that most of the technical work is behind us. We do have some final stages ahead. It’s not the kind of cost figure that one would consider to be material for a company the size of Microsoft.

In terms of the impact in the marketplace, that is something that time will tell. We’ve always been skeptical, and we said in court that we were skeptical, that there would be significant consumer demand for this additional version of Windows. The reality is that we provide in the marketplace today a version of Windows that has full multimedia capability and that works very well with competing media players that are on the marketplace today. In fact, one of the points we made in court was that many of these competing media players rely on the multimedia functionality that we will be taking out of this additional version of Windows that we’ll be offering in Europe. There are many other software applications that also rely on this code that will be removed from the additional version that we’re making available.

The reality is that this additional version that we are required to make available in Europe will provide consumers with less value rather than more. It will work less well than the version of Windows that they receive from Microsoft and computer manufacturers today. Only time will tell whether there is in fact significant consumer demand for this version. We are being ordered to make it available, that’s what we’ll do.

If at some point in the future we win and we’re then in a position to withdraw that product from the market, I think we’ll have to assess at that point precisely the best way to do that. That’s not where we are today. I think today we have to focus on doing an excellent job of implementing the order and complying with that, and then as this case moves forward we’ll see what the future brings and what the appropriate step is at that time.

(Operator Direction.)

QUESTION: Yes, good morning, Brad. As [for] comply[ing] with the ruling, does this decision affect any other products or features that would be integrated into Windows or Media Player as you work on future versions of Windows? And then if the case stands, would you need to go back and rework those features?

BRAD SMITH: A good question, Kristy, and I think I’d probably say there are two ways to think about that. First, you can read the decision on its terms, and what it orders Microsoft to do — and specifically what it orders the company to do — is make available in Europe a version of Windows that has a number of files for the Media Player taken out of the product. That’s the only thing it requires us to do under the terms of the court’s decision today and the Commission’s decision from March. And so that’s what we’re ordered to do, that’s what we will do.

Second, there’s the broader question that people talk about, which is does this set a precedent that will affect future versions of Windows or other features that are in Windows today. And I think the reality is that we won’t know and no one will really know what precedent is set by the court until the court makes a determination on the merits of the case.

Clearly today’s decision by itself doesn’t create such a precedent. To the contrary, the court acknowledges that there’s not one but four substantial arguments that we have raised on the merits, any one of which could enable us to prevail on the merits. The court doesn’t make that decision on the merits today, it simply identifies those arguments in its decision and then it’s to the panel that will assess the merits to make that decision. Until that decision comes, there won’t be a judicial precedent from the courts in Europe. We certainly see cause for optimism in the court’s analysis of these four arguments and we go forward quite optimistic about our prospects of winning the case when that decision is made. But until that decision is made, there really isn’t a precedent and we’ll all have to wait for the litigation to continue to move forward.

DIRK DELMARTINO: Thank you very much for joining us today. As you know, there will be an audio replay of this news conference available in approximately an hour, and you also have our press statement available on PressPass. Thank you very much.

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