Brad Smith: Response to European Court of First Instance Ruling

Remarks by Brad Smith, Senior Vice President, General Counsel, Corporate Secretary, Legal & Corporate Affairs, Microsoft
Brussels, Belgium
Sept. 17, 2007

BRAD SMITH: Thank you all for coming this afternoon. I have to admit that, as I stand here, holding this decision, I am reminded of a line that Woody Allen once uttered. He said: ‘I have taken a course in speed reading and I have read War and Peace in 20 minutes. It is about Russia’. We have had about two hours to read this; it has nothing to do with Russia, but it certainly has a great deal to say about the future of our company, our industry, and competition law here in Europe. I thought I would offer a few initial comments and then I would be happy to answer your questions.

First, I do want to start, as I did this morning, by conveying our thanks and gratitude to the Court of First Instance. Obviously, and not surprisingly, the decision is a disappointing one for Microsoft, but that does not change, in any way, shape or form, our appreciation for all of the time, energy and study that has gone into these issues, both in Luxembourg and in Brussels. We were pleased with the decision in terms of the issues relating to the Trustee and, at the same time, we would be the first to acknowledge that that was not the most important part of the case, either for us or for others in our industry.

The first and most important question for us, as a company, to address this afternoon is what we are doing and will do to ensure that we comply with this decision. We are 100 percent committed to complying with every aspect of the Commission’s decision. Let me walk through a few aspects of what has happened to date and the issues that will still need to be sorted out, hopefully quite quickly. As you all know, this decision fundamentally focuses on two things: the integration of Windows Media Player and the interoperability issues and the compulsory licensing of Microsoft’s communications protocols, especially in the server market. When it comes to the Media Player side of the case, we have had, on the market here in Europe, for over two years, a version of Windows that fully complies with the 2004 decision, and I have heard no one express any view to the contrary with regard to that. We offered Windows XP version N and Windows Vista version N and, obviously, as a result of today’s decision, both of those versions will continue to be offered to PC manufacturers and consumers throughout Europe.

With respect to interoperability, a great deal of work has been done. I would even go so far as to say that some progress has been made, yet we would also have to acknowledge that there are some issues that remain open and that we will wish to address as quickly as possible. It has not always been an easy process in terms of developing, creating and publishing the technical documentation that is required by the decision. I think, to some degree, that reflects the unprecedented nature of that obligation, but I do feel good that I can stand here today and say that I believe that we have available today a complete and accurate set of technical specifications. They are being used by licensees; I hope they will be used by even more licensees in the months ahead.

There are a couple of issues that do need to be sorted out and, as I said, I hope we will be able to sort them out quite quickly. One is the pricing for our communications protocols. As you all know, the Commission expressed the view earlier this year that our prices were too high. We dropped our prices at that time. If the Commission feels that our prices are still too high, we will, of course, want to understand that very quickly so that we can address it. The current price for protocols that are incorporated into products distributed in Europe is 1 percent of the revenue generated from the product, which is obviously quite a bit lower than it was before, and we will be focused on addressing that quite quickly if there is a need to do so.

There are also questions related to trade secrets, and the protection of trade secrets in the way our protocols are implemented in other people’s source code, which is something that also may need to be sorted out, again, if possible, as quickly as we can.

I think that, when one receives a decision like this, it is important to think about the specific obligations that a company like ours has under the 2004 decision. We also have to think about the message in a more general sense – at least the message that is being conveyed to us as a company. We have strived, over these last years, to do that, and there may well be the need to take additional steps because of today’s decision. I was heartened by the fact that the decision acknowledged that it is appropriate and lawful for us, as a company, to offer and to continue to offer the full version of Windows here in Europe. From that perspective, we can go forward and continue to offer, to our partners and to our consumers, the best technology that we can create.

At the same time, it is clear that the decision has important implications for additional offers that we may need to provide, such as Windows N, for example. I also think that it is worth reflecting on the fact that, in this area, as in many areas in life, it is not necessarily the case that one answer is the right one for all situations. I think that one of the most important steps taken the last two years was the dialogue that we had with the European Commission around the creation of Windows Vista. There were new issues that needed to be addressed in Windows Vista – issues that we acknowledged needed to be addressed under the contours of the 2004 decision.

A good example was security. It was readily acknowledged that consumers would benefit if Windows were made more secure, and we had a very constructive dialogue with the Commission on that point. It was a dialogue that enabled us to improve the security of Windows and yet build in more choices, so that computer manufacturers and consumers who wanted to use someone else’s security features instead could do so more easily. That may be a sign of one type of dialogue that it would be productive for us to have in the months and years ahead – we will have to see.

If today’s decision has important messages on product integration, it also has important messages on interoperability. When it comes to interoperability, the world, our industry and our company have changed enormously since 1998, when we received the letter from Sun Microsystems. We have sought to take to heart the message that the Commission conveyed in the 2004 decision. For example, in 2005, when Nokia came to us and asked to licence the communications protocols in Microsoft Exchange that communications with phones, we readily agreed to licence that technology. If you buy a phone from Nokia today, you will buy a phone that has that technology from Microsoft implemented in it.

We have done this in many other instances with many other companies in Europe and around the world, and it is perhaps somewhat ironic that, nine years and two days after we received that first letter from Sun, I also stand here just a week after we announced a new agreement with Sun, focusing, among other things, on improved interoperability with respect to new forms of server technology. If you look at the companies that we have sought to partner with around the world with respect to interoperability, it clearly is a different industry today, and we clearly are a different company today. The list starts with companies like Sun, Novell and Nokia, but includes a wide variety of hardware and device manufacturers and software developers, literally located around the world. It is clear to me that we will press forward and take new steps to broaden our interoperability partnerships with others in our industry. We look forward to taking those steps not in months or years, but in the weeks to come.

In conclusion, I would say that this case has always been about many things, which all of you here, who have written about it over the years, know as well as I do. Certainly, for us, one of the things that it has always been about is trying to build a better relationship with the European Commission and stronger ties with Europe as a whole. The decision is not what we would have hoped for, and to say anything less would be less than candid, but it does provide us some new clarity, on which I hope we can start to build a new and stronger relationship with the European Commission. Despite the nine years of sometimes tense discussions and adversarial processes, I feel good that we have always maintained a professional relationship, founded on genuine respect and appreciation for the public servants who work here in Brussels.

Just as our relationship with the Commission is important, our ties with Europe are more important still. It is remarkable, as I mentioned this morning, that, when this case started, Microsoft was spending only US$3 million a year on research and development (R&D) in Europe. One might fairly ask what took us so long. I am pleased today that we spend almost $500 million a year on R&D in Europe, a number which will clearly continue to rise. Based on any measure you may wish to select – the number of language versions we support, the number of people we employ, or the number of companies with which we partner – our ties in Europe have never been as broad or as deep as they are today, yet I can say, with full confidence, that, one year from now and five years from now, they will be broader and deeper still. No court decision – either positive or disappointing – can stand in the way of that. Thank you.

QUESTION: Are you going to appeal?

BRAD SMITH: We have not made that determination. We have barely finished reading the decision once. This is the kind of decision one needs to read a few times and reflect upon before making that kind of decision. We have plenty of time for that kind of thinking, so it is not something I want to address today.

QUESTION: Where are the other complaints filed against Microsoft going to go, now that the Commission has quite a good precedent behind it? Have you had any kind of contacts with Commissioner Kroes today?

BRAD SMITH: I called the Commission this morning to convey my congratulations for those portions of the decision which it won, which were considerably longer than the portion that we won. I will not describe anything further, or even who I spoke with, but it was appropriate and important to do that.

Only one other complaint has been filed to date at the Commission with respect to Microsoft. That was filed by a group that represents IBM and one or two other companies. They were focused on requiring that we licence other communications protocols relating to our SharePoint server and Exchange server, and some other products. We have conveyed our willingness to licence those technologies. As a matter of business policy and approach to the industry, we are prepared to licence to others in our industry, on reasonable and non-discriminatory terms, the technologies that are important to interoperability. If there are specific questions that people have, I hope they will come to us. They can always go to the Commission first if they wish, but they will make more progress if they come to us. We are open for business when it comes to licensing technology and intellectual property rights that are important for interoperability.

QUESTION: I have a point of clarification: the fact that you are going to take additional steps to comply with the decision does not mean that you are withdrawing your right of appeal, if I understand correctly. Second, from what we heard from Commissioner Kroes this morning, this has a lot to do with your dominance in the market, given that 95 percent of personal computers on the market run on Windows. Do you expect your dominance in the market to decrease, perhaps at least in Europe, as a result of this decision?

BRAD SMITH: First of all, I am not saying anything today on any appeal. We need to think about this: it is a serious and substantial decision and it deserves serious thought, rather than an instantaneous decision on what to do about something like an appeal.

There are always important questions under competition law about how one thinks about the goals of competition policy. I completely agree with the proposition that the purpose of competition law is to promote choice, to protect consumers and to encourage us all to offer better products. I hope that Microsoft and other large companies will continue to have the opportunity to offer better products to consumers, and I hope that consumers will continue to have the opportunity to choose our products if they believe that we genuinely provide the best offering on the market. Market shares tend to go up and down – sometimes they fluctuate a lot; sometimes they fluctuate a little – but the rules of the road need to stay constant. Today’s decision helps to specify what some of those rules are, but I genuinely believe that these are rules that speak more to how one competes than who should win the race.

QUESTION: Have you spoken to Bill Gates and, if so, what did he say?

Second, why are you charging for this interoperability information anyway? It has been said that it is a bit like a telephone company charging another telephone company for technical information to allow them to route calls through to their customers? Why are you charging them for this?

BRAD SMITH: I have had a chance to be in touch with several people in Washington State, where it is about six o’clock in the morning. People are just getting up there and they have not yet had an opportunity to even read as much of this as we have.

We have always tried to explain – sometimes successfully and sometimes less so – that there is a tremendous amount of energy, time and creativity that goes into the creation of these technologies. This is not a telephone book; it is over 8,000 pages of technical specifications that took us millions of dollars to develop. The documents themselves represent intellectual property in the form of patents, copyrights and, as today’s decision reflected, trade secrets that, under the 2004 decision, are also accorded the same weight as those other intellectual property rights. Telephone companies, in fact, are typically permitted to recoup costs when they engage in genuine innovation and investment.

Of course, it also has to be a system that works for everyone. The prices have to be ones that are reasonable – hence the requirement in the 2004 decision – and they have to be offered on a nondiscriminatory basis. However, the decision itself did not specify that the only reasonable price was zero. Our goal is to be in complete compliance with this decision. We will look to the Commission, among others, for guidance. We want to do the right thing but I am not necessarily here to urge us and other large companies in our industry to all sign up to the proposition that innovative technology should be free simply because it may be relevant to interoperability.

QUESTION: So you are committed to charging –

BRAD SMITH: I am committed to complying with the Commission’s decision.

QUESTION: How swiftly do you think you can take these additional steps that you talked about to comply with the original March 2004 decision? Do you fear that, en route, there may be another hefty fine on its way for your company?

BRAD SMITH: It is not our desire or our goal to have continued arguments or disputes. We want to move forward, in compliance with the 2004 decision. There are a number of things that are not spelled out explicitly in the decision itself. I am hopeful that we can have the kind of conversation that will enable us to know with confidence what we must do and what we can do in other areas, and I am hopeful that we can do that very quickly. I would also underscore that I am hopeful that we can take not only the kinds of steps with respect to something like pricing, but also pursue other initiatives with others in our industry – the kinds of initiatives that will make clear and real our commitment to work with the rest of the industry to promote interoperability.

QUESTION: You stressed good relations with the Commission, but today Mrs. Kroes used rather harsh words in her press conference. She said that today’s verdict is bittersweet because, on the one hand, it confirms the Commission’s position but, on the other hand, it also confirms the serious damage that Microsoft’s illegal behavior brought to both business and consumers. Can you comment on the Commissioner’s words?

BRAD SMITH: I do not want to get into a debate with anyone at the Commission. I would point out that we continue to work in a very dynamic industry. The Media Player issue is fundamentally about the future of digital media. Look at the world of digital media today: Apple has something like a 70% market share for digital music; iTunes is far and away the leading source for music on the internet; the iPod is far and away the leading hardware device for digital music; and Adobe Flash is far and away the leading internet-based technology for the streaming of media, which was, in fact, the very issue that was the focus of the 1998 complaint that started a lot of the Media Player issue.

I would, then, look at that part of the market and suggest that the market is moving forward and consumers are benefiting from a lot of choice. It is true that Apple does not licence its communications protocol for the iPod or iTunes, yet it certainly does not appear that the market has been held back by Microsoft’s incorporation of Windows Media Player. Similarly, I would look at the server market. Windows Server has done well, but has not grown as quickly in recent years as Linux has. It is a dynamic market that has been entered by new entrants. They have done well and I expect that they will continue to do so. None of that is intended for a moment to suggest that we can afford to fall short of our obligations under this decision. We need to live up to the kinds of obligations that the Court and Commissioner Kroes reflected upon, and we are committed to doing so.

QUESTION: Would you expect the Trustee decision to affect past and future non-compliance fines?

BRAD SMITH: I have had a chance to read the Trustee portion of the decision once and I would like to read it more than that before reflecting on what that means for the nature of any process or the future. I think Commissioner Kroes had a similar comment. We all need to read this and to think before we formulate opinions and decisions.

QUESTION: You said that the decision does not mean that you have to charge zero for your server software protocols, but the Commission claims that the criteria the Commission would apply have been upheld by the Court. Do you see this differently?

BRAD SMITH: I should be clear on two things: first, with respect to the interoperability information and technology and intellectual property rights in this decision. I was not talking before about the decision; I was talking about interoperability technology in general. We will look to the guidance of the Commission and will absolutely listen as carefully as possible to the guidance we receive. I mentioned that we had dropped the price quite substantially and, if that price is, in the Commission’s view, still too high, it will be very important for us to understand what price is low enough, so that we can conform to all of our obligations. There is a lot more to the world of interoperability information and technology than the information and technology in this decision, and I was talking more broadly before. I am not trying to rule anything in or out.

With respect to this decision as a whole, we are all going to have amply opportunity to think about what it means for Microsoft, and for our industry and every other industry in the world. The decision very clearly gives the Commission quite broad power and discretion. There are many companies in our industry that have a very large market share. People talk about Windows with 95 percent, or our server share of 60-80 percent. As I mentioned before, Apple has a 70 percent share for digital music in Europe; Google has a 70-80 percent share for search – in some countries in Europe, it has over a 90 percent share. IBM has 99-100 percent share for mainframe computers in Europe and the rest of the world.

Information technology tends to be an industry that is characterised by successful companies having large market shares. Sometimes, those market shares last; in many others instances, they are fleeting. It is very clear that we all have the need to look to Europe and the European Commission under the terms of this decision, and it is equally clear to me that this decision will occupy, as it should, the thoughts and discussion of many people, not just in the weeks ahead, but in the months and years to follow. It is one of these decisions that has that kind of extraordinary impact. Thank you very much.

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