Brad Smith: New America Foundation: “Windows Principles”

Remarks by Brad Smith, Senior Vice President and General Counsel, Microsoft Corporation

“Windows Principles”

New America Foundation

National Press Club

Washington, D.C.

July 19, 2006

TED HALSTEAD: Thank you for your attention, and welcome to this forum. My name is Ted Halstead. I’m the founder and president of the New America Foundation, and I’m delighted to welcome you to this luncheon featuring Brad Smith, the general counsel of Microsoft.

There are three reasons why I’ve been really looking forward to today’s luncheon. First, because it’s an incredibly important and timely topic. Second, because we have a terrific speaker who has been at the forefront of defining Microsoft’s competitive strategy and positioning and handling all of its high profile legal cases. And there’s also a third reason why I’ve been really looking forward to today’s luncheon, which is a highly personal reason.

And if you’ll notice in the New America brochures that you have, we have a very distinguished board at New America, and – it’s at the back of the brochure. And in their infinite wisdom, they decided to give me a six-week summer leave stretching until Labor Day and beginning as soon as this event is over.


And in fact, my leave was supposed to start last Friday, and I was so interested in this event that I deferred my leave for an extra couple of days in order to be here with you today.

Anyway, that’s my little personal anecdote why this is an interesting event for me.

At the height of the NASDAQ boom, The New York Times once ran a profile of New America describing the foundation as Silicon Valley’s new think tank, which frankly was a bit of an overstatement. I don’t know if there’s anybody here from The New York Times. Nevertheless, it’s clear that questions of information technology and competition have been a core interest of ours since the inception of New America.

Not only do we study the various ways in which information technology impacts society and the daily lives of Americans, but we actively promote a number of policies to help spread those benefits as widely as possible.

For example, as many of you know, we have a Wireless Future program at New America led my colleague, Michael Calabrese, who cannot be here today. And the purpose of that program in large part is to promote universal, pervasive broad band to all. And I believe that we’ve had an interesting partnership with Microsoft on that noble pursuit.

Which brings us to today’s topic. There’s little question that Microsoft’s competitive strategy for its operating system has enormous implications for the technology industry at large and the ability of competing software developers to create applications that add value to – well, ultimately people’s lives.

Now as we all know, the debate over Microsoft’s power raises a series of fascinating policy questions, and these are all the more relevant now that Microsoft is preparing to unveil its Vista Windows system, and that is obviously being closely watched by consumers, regulators, competitors and antitrust authorities, not only here in the United States but abroad.

It’s a really fascinating environment. I am just looking at it from the outside, but for those of you who are in the inside, it’s a fascinating environment where companies must cooperate at the same time as they compete, and it’s all about setting up rules of the game to ensure the best possible combination of innovation and competition, the obvious question being how do you balance those two, and the subsidiary question being, what is the role of consumers, regulators and innovators in striking that balance?

The conversation gets all the more interesting when you add the international dimensions, given that Windows Vista is going to be a test case, and how multiple political economic power centers will impact the U.S. economy. We all know about the recent E.U. fines against Microsoft, and also there’s an apparent decision to exclude XPS from the European version of Windows Vista, which I’m sure we’ll hear all about.

But this raises important questions about how regulatory decisions in Europe and Korea impact not only Microsoft but also the business climate here in the United States.

Today’s luncheon is going to be I think particularly noteworthy, because Brad just mentioned to me in our chat before the start that he’s going to be seizing this occasion to unveil a new set of guiding principles for Microsoft’s competitive policies which I guess he mentioned are sort of a means of self-regulation, and I’m very eager to hear what they are.

Brad has a fabulous challenge at Microsoft, because his forte is articulating answers to all of these questions and being the point person in handling all of Microsoft’s not only legal cases but also community affairs here and abroad.

Many of you already know Brad, and if don’t, you’ve no doubt seen him quoted in the last week reacting to the E.U.’s determination that Microsoft has not fully complied with the demands of its 2004 competition policy ruling. We’ll certainly hear Brad’s perspective on that and a number of other topics.

Let me give you just a little background on Brad. He is general counsel and senior vice president at Microsoft. He joined the firm in 1993 and has been the company’s general counsel since 2002. He oversees all of the company’s legal work and is responsible for Microsoft’s government, industry and community affairs activities.

He plays a leading role on every issue from intellectual property to competition law to Internet legal and public policy issues. He led the negotiations that resulted in the historic, nine state attorneys general dropping their antitrust appeal against Microsoft in 2002, and he’s also the company’s chief compliance officer, and therefore responsible for Microsoft’s work to implement that consent decree established in 2001.

Before joining Microsoft, Brad was a senior partner at Covington & Burling, both here in Washington, D.C. and in London. And I’ve been really looking forward to this talk. He’s going to speak to us for about 15 to 20 minutes, and then we’re going to devote the bulk of the rest of our time to a lively question-and-answer session which will involve all of you.

So with no further ado, please give Brad a warm hand. Thank you.

BRAD SMITH: Well, thank you. Thank you, Ted. It’s great to have you here. I didn’t appreciate that we were interrupting your vacation. I’m tempted to suggest we should just go straight to the Q&A so we can let you get onto something I think will be more enjoyable.

I’d really like to say thank you to all of you who are here. You know, it is remarkable for me as I look around the room and just see all the faces. You know, there’s a lot of people who have supported us over the years. There’s a lot of people who have disagreed with us and been adversaries over the years. But either way, there’s a lot of people who I count among my friends. And it’s been great to have these friendships over the years, even when we haven’t always agreed on the issues before us.

This is an important opportunity to us to talk about a topic that we believe is important to our industry. As many of you know, major parts of the U.S. antitrust ruling, the ruling that took effect in 2002, will expire next year. And we’re here today to talk about the future and our commitments looking beyond.

People have been asking us, what are we going to do in 2007? What are we going to do when these principles – when this ruling expires, or at least parts of it? And the answer is very clear. Through the set of voluntary Windows principles that we are announcing and adopting today, we’re taking a principled, transparent and accountable approach to the future of our operating system.

We’re not for a moment claiming that we can in a single document answer all questions for all time or even for any time. But we are grounding these principles in the major stakeholders of our industry and their needs. We’re ensuring that computer manufacturers will have choice; that software developers will have opportunities to build great products on top of Windows, and that users will have interoperability among disparate computer systems and applications.

And so what I’d like to do is spend a little bit of time to flesh this out, to talk a little bit about this with you, and then really I think get into the most interesting and enjoyable part, as Ted said, your questions, and no doubt a little bit of discussion.

I would at the outset like to talk about, well, why here, why now? You know, why is Microsoft making these announcements today? Well, you know, the why here is easy. The New America Foundation is a terrific organization and it’s a real pleasure to have the opportunity to be here with them today. They’ve assembled a lot of the great minds, especially great young minds, in this town and in this country to focus on key issues, and we strongly appreciate the opportunity we’ve had to have a dialogue with them and to have them bring us all here together today.

Why today s a question that at least requires a few more sentences to answer, although I alluded to some of those points a moment ago. As we think to the year ahead, 2007 is clearly a very important year, at least for our company, and I think in many respects, for our industry.

As many of you know, we’ve been working on the next version of Microsoft Windows for a long time. In fact, most people, including ourselves, would say too long a time. But we are almost done with this product. We’re very excited about what Windows Vista is going to do for computer users around the world, and it’s clear that it is going to be in the hands of consumers early in 2007.

But 2007, as I mentioned before, also marks some other important milestones. It’s the 10th anniversary next year, if you will, of the start of a lot of the debate that so many of us participated in. It was in October of 1997 that the Department of Justice filed its initial lawsuit under a 1994 consent decree. And then it was that debate that led to a broader lawsuit involving the Department of Justice and 20 state attorneys general in 1998.

Next fall marks not just the 10th anniversary of the start of that process, but as I mentioned, next November marks the expiration of major parts of the U.S. antitrust ruling and consent decree.

As you may know, as you may recall from reading news stories recently, in May of this year, Microsoft, the Department of Justice and the state attorneys general agreed to extend until 2009 the substantive provisions in this decree that apply to the licensing of client server communication protocols. And the agreement also covers a number of other procedural aspects of the consent decree.

But seven major substantive provisions in the U.S. antitrust ruling will expire next November. And as I mentioned, people already are increasingly asking us what we intend to do regarding the business practices that we put in place under the ruling once it expires.

In addition, we obviously live in a time when these issues are not important in the United States alone. As we’ve learned over the last decade, these issues genuinely are worldwide in scope. Given the global nature of the issues and the very broad public interest in how we address our business practices and our design of a product like Windows, we thought it was important to make some decisions and get out well in advance, talk about what we plan to do so we can continue the dialogue with people certainly here in Washington, but also around the world.

As we do that, we very much appreciate that a lot of people ask us what have we learned? What has Microsoft learned from the past 10 years? And the answer is, we’ve learned a lot. The lessons have not always been easy, and they certainly have not always been painfree, but we have learned a lot, and one of our goals is to apply the lessons we have learned.

And I’d like to talk at the outset about three lessons that to me are among those that are most important.

The first lesson is this. As creators of an operating system used so widely around the world, we recognize that we have a special responsibility, both to advance innovation and to help preserve competition in the information technology industry. We take this responsibility very seriously. That’s one of the reasons we’re announcing these principles today.

We recognize that Windows serves as a platform on which thousands of businesses and millions of individuals every day base an important part of their work and their lives. Windows’ success is obviously at the core of our success as a company, and we very much appreciate that we will be successful in the future only if we fulfill the very special and high responsibility that we have.

We recognize that for users, an operating system is important solely because of what it allows other people to do on top of it. People don’t buy a PC simply to run an operating system. They buy a PC to use all the applications and Internet services that they can access on top of that operating system.

In a sense, an operating system alone is a bit like a dinner table without food or a Broadway stage without any actors. It is the platform on which other things rest, but it is not the end in and of itself. We need to fulfill our responsibilities to everyone who builds on top of our platform if we’re to fulfill our responsibilities to the world at large.

I think there’s a second lesson that’s also important. We’ve learned that people care not only about what we do but about how we do it. So, our goal today is to be principled, transparent and accountable in our design of Windows as we go forward now and in the future. The principles that we’re announcing today assure customers, our industry and regulators alike, that Microsoft is committed to developing Windows in ways that advance innovation for consumers and preserve important and robust opportunities for competition.

That’s why we’re adopting these principles, and that’s why we’re making them so public in this manner. It’s why we are going to use them for the future of our business and why we are using them as our guide star for Windows Vista itself.

And then there’s a third lesson that I think is also important. We have definitely learned that it’s important for Microsoft to be open and constructive as a matter of process in working with governments and the rest of our industry in the design and release of new versions of Windows.

It’s not sufficient for our developers to simply get feedback from computer users and simply go off and make decisions about Windows by themselves. We need to engage in an open dialogue with the industry and with regulators, and we need to do it before products are released, not after.

For the past two years, we’ve had a very open and constructive dialogue with antitrust authorities here in the United States. We have benefitted from that dialogue and we have made changes to Windows Vista because of it. And for the past year, we’ve had a similar dialogue with authorities in Europe and elsewhere, and we again I think have benefitted from this dialogue and have made changes to Windows Vista because of it.

Today we pledge our continued support both under the existing U.S. antitrust ruling and beyond, for that type of dialogue to continue.

I think it’s also worth noting one other thing that has become clear over the last decade, and that’s that the world has changed, and it continues to shrink. The truth of the matter is that issues today are typically addressed by many, many governments, oftentimes simultaneously. So it’s important for us as a company to provide information on a worldwide basis, and it’s also important I think for regulators to share information and to consult and coordinate and collaborate more closely.

To the extent that that kind of closer collaboration is possible, and to the extent that companies like Microsoft can support it, I think the global economy as a whole will benefit.

So let me turn to the principles themselves. Hopefully you have a copy. There was a goal here of providing people with copies as they walked in, and if there are people who don’t have copies, raise your hand, and someone will be happy to provide them. Here at the front two tables, I see that we don’t have people who have them.

As you can see, we’ve really focused on 12 tenets to govern and guide the development of Microsoft Windows as we go forward. I’d say a word or two, if you will, about the philosophy, so to speak, that led us to craft the principles that we did.

We thought a lot about the last decade. We thought a lot about the last five years under the U.S. antitrust ruling. We thought a lot about issues elsewhere in the world. And, you know, in thinking about these issues, one naturally starts with the case here in the United States and the work that was done by the Department of Justice and the state antitrust authorities beginning in the late 1990s.

The ruling of the Court of Appeals here in Washington, D.C. took an approach that promotes both innovation and competition, both by Microsoft and by our competitors. And fundamental to this approach is a recognition that operating systems do evolve over time, and that this evolution both benefits consumers but also can significantly affect other software developers, enabling them both to build better products that run on top of the operating system, but also presenting new competitive challenges to them.

In many cases, the addition of new functionality to an operating system makes life easier for software developers who can draw upon that capability. But at the same time, adding functionality to an operating system may make life harder for them, at least those that compete with features that are in the operating system.

The U.S. antitrust ruling recognized that innovation in all forms should be encouraged; that Microsoft should keep improving Windows, but it’s important at the same time that opportunities for competitors be fully preserved. So the U.S. ruling imposed a series of rules upon Microsoft regarding the design and licensing of Windows, rules designed to ensure that the marketplace would have the benefit of both approaches – integrated functionality and standalone offerings from competitors.

We’ve seen over the last five years steady improvements, for example, to the audio and video playback capabilities in Windows, for example, in Windows Media Player. And the marketplace and consumers have benefitted from that. But at the same time, we’ve clearly seen phenomenal success by others, perhaps most particularly by Apple in its iPod and its associated iTunes software, most of which runs on Windows.

I think that’s a good example of where we’ve been able to see advanced, enhanced innovation and integration in Windows benefitting consumers and enhanced, advanced competition with new products and new successes by competitors as well.

Certainly that philosophy informs a part of these principles. The principles, as I mentioned, are divided into 12 tenets, and they really address the three major stakeholders in our industry, ensuring choice for computer manufacturers, opportunities for software developers and interoperability for computer users.

Let me say a word about the principles, and then obviously will be happy to talk more about them. The first principle comes directly out of the U.S. antitrust ruling and ensures that Microsoft will design Windows in ways that make it easy for computer manufacturers and users to install non-Microsoft applications and to configure Windows-based PCs to use non-Microsoft programs instead of or in addition to Windows features.

We try to spell out what that means. And you see five tenets, for example, under this principle. The first is the notion of installation of any software application, the notion that any computer manufacturer can install any software application that runs on Windows, no Microsoft agreement will ever forbid a company from doing that. And ultimately, of course, users are in control of their PCs. Computer manufacturers get to decide what goes on a PC when it goes out the door, but users get to decide what remains on their PC once it’s in their home. They can add additional software, they can delete additional software, they can use whatever features they want.

The second tenet regards easy access. The computer manufacturers are able to add icons, shortcuts, entries to the Windows Start menu and the like. We design the operating system to encourage that, and we reinforce that through our software licensing.

The third tenet is about default settings. I think this is something that has become even more significant in more areas of software over the last five years. We will continue to design Windows and license it on terms that enable computer manufacturers and users to set non-Microsoft programs to run by default. In that way, fundamentally, manufacturers and users can choose to use any non-Microsoft software in place of the features built into Windows itself.

A good example is that a computer manufacturer can configure a machine so that it runs certain media files using Real Player, for example, instead of Windows Media Player. OEMs get to make the initial call, and then users are in control.

And the fourth tenet focuses on exclusive promotion. Under the U.S. antitrust ruling, we’ve had contracts, and we will continue to have contracts that ensure that computer manufacturers can even promote in a competitive offering exclusively, in effect by removing the access, the icons, the Start menu entries and the like to features in Windows. That way, they can promote a different media player or a different browser or something else.

Under the consent decree and the U.S. ruling, these two tenets regarding defaults and exclusive promotion, have applied to certain categories of what is called middleware; the browser, the media player, messaging technology. We will broaden our commitment to address these types of issues.

For example, we recognize that an important new issue regards Internet search. And so we’re committing today under these principles that these tenets will be applied to Internet search as well. If a computer manufacturer wants to set a competing search service, which is obviously all run from a web page, so that that service runs by default, they can do so.

If an OEM wants in fact to go even farther and display in the dropdown box in Internet Explorer, only, for example, a single Internet search service, a search service offered by a Microsoft competitor, an OEM is free to do that. And yet we’ll also ensure that users continue to remain in control of their machines and can reset settings and choose whatever they want as things go forward.

And the last tenet in this area obviously as you can see addresses business terms. The consent decree established a provision regarding uniform terms for all of our contracts with PC manufacturers. We’ll continue to implement the spirit of that provision. We’ll continue to have transparent pricing, a price list that’s posted on the web, we’ll continue to create uniform contracts.

We will at the same time give OEMs the ability to come to us and raise issues where they feel they have unique needs, where terms need to be customized to meet their business model, and will have the opportunity to meet their needs, but in all cases, that will never be based on the extent to which a computer manufacturer promotes our software versus the software from someone else.

So those five tenets together are designed to ensure that computer manufacturers and users really do have choice. Of course, the choices are more meaningful if the offerings by competitors and software developers are more plentiful and more robust. And that’s why we created the second principle, that Microsoft is committed to designing Windows to maximize opportunities for applications developers and website creators, to build and promote innovative products on the Windows platform. And you can see the tenets in this area as well.

The first concerns APIs, Application Programming Interfaces, the interfaces in Windows that can be called upon by software that runs on top of Windows. The antitrust ruling here in the United States created an obligation for Microsoft to document and disclose all the APIs that are accessed by certain categories of middleware. Again, the browser, the media player, a few others.

We will both continue that commitment and broaden it. So we’re committing today that we will document and disclose all the APIs in Windows that are called by any Microsoft application, whether it’s middleware or a standalone application like Microsoft Office or one of our Web services like Windows Live.

In effect, this ensures that the rest of our industry is able to use the same technology building blocks in Windows that Microsoft’s own developers are able to use.

When it comes to Internet services, we recognize that this is another new issue. It’s an issue that has really come to the forefront since the U.S. antitrust ruling, and we’re articulating today our conviction and our decision to contribute to innovation in this area of web services through what we call Windows Live and to design Windows Live as a product that’s separate from Windows, so customers will be free to choose Windows with or without Windows Live and building upon the prior tenet, all of the APIs in Windows that are accessible to Windows Live will be accessible to other web services as well.

The eighth tenet addresses open Internet access. It commits, if you will, that Microsoft will honor the principle of net neutrality. We will never charge a fee for the use of Microsoft Windows to access any legitimate site or service on the Internet.

And the last tenet in this area again addresses this issue of exclusivity, and a principle that finds its roots in the consent decree. We committed in the consent decree that we would refrain from using the exclusive contracts, and we will continue that commitment under these principles.

And then the last area that we talk about here is interoperability, interoperability for computer users. We recognize that people often use our software in networks that run other people’s operating systems and other people’s software as well.

Interoperability is an important objective and an important commitment for us as a company and for us as an industry. So our tenth tenet relates to protocols. We committed legally that we will remain obligated to license until the fall of 2009 under the consent decree and its extension the client server communications protocols in the Windows desktop operating system, and we commit here, as we have said previously, to continue this practice even after that obligation expires as a matter of law in 2009.

And we also commit to create this documentation as part of or product development process. That will ensure efficiency and high quality. And we also convey our openness to talk to other people who may be interested in licensing other protocols, protocols outside those covered by the scope of the consent decree or these principles, so that we can explore whether that would make sense as well.

We recognize that patents have become more important in the software arena since 2002, and so we commit today that we will make generally available for licensing all of the patents that we have in the operating system space, save those that differentiate our user interface, the appearance of our software on the screen from competing software. This has been a traditional industry practice, and it gives us I think a good opportunity to learn from the positive experiences of others and assure people that our patents are open and available for licensing.

And finally, we recognize that standards have become more important. So we’re announcing today our commitment to continue to involve ourselves in a vigorous and responsible and even more energetic way in the work of standards organizations around the world, and to implement standards in a responsible manner.

This then is the principles that we’re pledging to continue to implement. We’ll review these principles from time to time, and at least once every three years, we’ll sit down in a more formal way and we’ll determine whether we should adopt additional principles to take account of new technologies or legal trends or business practices, and whether we should modify any of the existing principles to take account of these factors as well.

But any changes we make will be displayed in a transparent manner. They’ll be published on Microsoft’s Web site.

Before summing up, I would like to say a few words that look beyond the principles. We’ve had almost five years of experience now under the U.S. consent decree. And I think one thing we’ve learned is the importance of humility. If there’s one thing that I believe, it’s that no one ever died of humility. There may be even a few cases where some lives were prolonged because of it.

And I think in that context, it’s important for us to acknowledge up front, it is not possible in any single document to answer all questions, either now or for all time. And we don’t claim for a moment that this document does that.

First, I think it’s important for us to say quite publicly and explicitly that these principles for a moment do not supplant the continued application of antitrust law, or the important continuing role of antitrust agencies and courts in applying and enforcing this law.

I think this is an important tool and an important step, that I hope people will conclude aids in our implementation of the antitrust law. But the first step and the last step is always with the law itself and with the people who are in government and in courts and responsible for interpreting and enforcing it.

Second, we do not pretend that these principles answer all questions for all time or even for now. You know, we readily recognize that in addition to these 12 tenets, there are other issues that are being addressed by competitors and by regulators and by courts, now and in the future.

They can’t possibly address all of these questions, and they don’t attempt to. They don’t, for example, address all the issues in the European Commission’s 2004 decision, which, of course, is being reviewed by the European Court of First Instance, and with which Microsoft has a continuing legal duty to comply.

And yet at the same time we believe that the presence of some important unanswered questions shouldn’t impede us from moving forward in those areas where there is clarity and where there is consensus. It would be I think a mistake for all of us if we allowed that kind of continuing debate in some areas to stop us from doing the right thing in these other areas.

Third, and this really flows from the two preceding thoughts, we’re committed to an ongoing and constructive dialogue with governments and others in the industry regarding these issues. I know that dialogue will continue with regulators under the continued application of our judgments in the United States. I hope that dialogue will continue both at the federal level and at the state level even after the expiration of these judgments in 2009. And we equally hope that these dialogues will continue elsewhere in the world where these issues are important to governments.

In conclusion, I’d step back for a moment just so we can think about these issues beyond Windows and beyond Microsoft. If you think about the world today, it’s very clear that economic growth in this century will turn on new technologies in a wide variety of fields that will both require substantial investments in research and development and lead to widespread adoption throughout the world. Windows is but one example of that type of product.

You might even say that Windows was the first information technology product to be subject to so much regulatory scrutiny on a worldwide basis. And this isn’t surprising, given the important role in the broadening use of computers. But it will not be the last such product.

So the issues relating to Windows really are important more broadly. I think the issues relating to Windows have been challenging in part because new technology always raises questions of whether there should be new rules, or whether the old rules should be interpreted in new ways. This is natural.

As the IT sector continues to evolve and as other technologies come to the economic forefront over time, these issues will become even more pervasive and even more important to the global economy. I think that’s one reason we want to try to get this right. It’s one reason we want to define principles and processes that can serve well the needs of innovation and economic growth.

We’re just one company, and this is just one product. But we hope that others will have the opportunity to learn from and build upon the steps that we throughout our industry and in government circles have been taking these past few years.

And Mark Twain once said it takes three weeks to write a good impromptu speech. I can tell you, it took us a lot longer to put these three pages together.

You’ve been very patient. I thank you, and I look forward to your questions. Thank you very much.


TED HALSTEAD: That gentleman who died more recently, John Kenneth Galbraith, had a sign on his door that said, “Modesty is a vastly overrated virtue, and that is how he lived his life. It is very nice to see that this is, if it ever was, it certainly is no longer a guiding principle for Microsoft. (Laughter.)

I have to say, first of all, I don’t care why that deters my holiday, because I think that from my perspective, this is about a historic turning point, not only for Microsoft, but also for the industry as a whole. And I just personally want to commend you for taking this proactive step and also embracing this Microsoft paradigm, which I think is very impressive.

Let me launch with the first question, and then we will open it up to all of you. The obvious question going over this list is, “Of these 12 principles, how many of them are already part of the – how many of them are a truly voluntary where we’re going beyond what is already being imposed by regulators either here or in Europe?” If you could go through it very briefly as well, and a quick chance at that.

BRAD SMITH: Sure. You know, it’s a great question, and I think – my pride. I think of the 12 tenets, probably eight of them find their orders in them in some way in the intent to create – a number of those eight are being broadened today, so that we’re extending them, and there’s actually a broader range of software for – excellent APIs that are financially provided, go beyond the consensus – numbers three and four on the quality it takes for promotion, but broadening to address a new topic like Internet search.

So, of the eight – origin in many of the three and – four of them, I think you really don’t find – if you look at something like number seven, on Internet services, if that wasn’t your graph in 2002. Number eight, open Internet access, that was not part of the issues there. Number 11 and 12, you wouldn’t find – and those are new as well.

And I think that really reflects the dynamic nature of our industry. New issues come to the forefront. There’s no way that people could have seen everything in 2002 that we need to address in 2006. And I think we can just take it as a given that if it’s 2010 or 2015, there’s going to be vocabulary that we won’t even recognize – across the country.

We were meeting in Seattle yesterday, and they had the [inaudible] for the people who were down there, and we were talking about technology a decade from now, and one of the things I noted is that we had had this conversation a decade ago, and I had said we were talking about spam, they would all have concluded that we were having ham for lunch. And if I said the next thing we needed to do was talk about phishing, they would have expected to see some rods and reels. You know, so who the heck knows what labels we’re going to be applying to talk about what issues or problems a decade from now. We need to change things [inaudible].

TED HALSTEAD: I think we can all see why Brad was promoted to this position because he has a great ability to talk about all of these things in a language that everybody can understand. And the one little anecdote I’ll mention is that based on what you just said, it seems to me that American Board Member Eric Schmidt, also the Chairman NCO – will be rather pleased with all of this here.

Let’s go to questions.

QUESTION: I don’t think it would be fair to let you leave Washington without addressing the issue du jour, which is net neutrality, something that you have touched on, and your principles. You might be, to put it well, sir, to address one of the arguments from the net neutrality debate. It is argued that there is no need for legislation, and no need for Federal Communications Commission policy on net neutrality because the anti-trust laws provide suitable remedies in the event of problems in the future. I’m wondering, from your perspective, as having been on the receiving end, whether you think that any trust law in policy is a suitable substitute for legislation in this area?

BRAD SMITH: I would say three things. Number one, you know, we are committed to the principle of net neutrality. That’s why we embrace it here in these principles. You know, the internet is a very special asset for the world today, and it is special, in part, because it’s a globally singular network. It’s about the most globally singular technology on the planet, and it’s special because anybody can access anything anywhere. And we don’t want to see that change.

Number two, antitrust enforcement clearly is very important. I think that’s been proven in the case of software, and I don’t meet general counsel in any major company who would question that premise. In no doubt, antitrust rules and enforcement will continue to play a very important role to new technologies and practices with respect to the Internet.

And I’d say a third thing, as well. Life is hard in the technology sector when the rules are defined only after the products are finished. That, I think, has been a real challenge for our company and our industry over the last decade. A lot of times, that is almost inherent or necessary because when the new technology comes to the forefront, it naturally takes some time for government officials and agencies and courts to decide what the rules should be, but you also have the opportunity to reach a point, sometimes, where things have become sufficiently concrete, that it’s really better for everybody if there can be some codification.

And for better and for worse, we’ve lived in the United States for about 130 years with an antitrust provision on large companies, monopolization, that is codified in basically two sentences. And that really places quite a substantial burden, I think, on government officials, on judges, on lawyers, and companies to try to predict what the law is going to be.

And so when I do think we get to a point where the dust has settled, the issues are more concrete, and you can get some codification, that’s not bad. And sometimes it’s codification in the antitrust arena, but frankly, more often it is then picked up in another regulatory area. And I think that is why I think that the – whether one agrees or disagrees that a particular bill should be passed, I think it’s healthy that everybody is engaged in this kind of dialogue about what the rules of the road will be as the internet moves forward.

QUESTION: Do you feel like you’re getting a fair shake in Europe, and do you agree with some of the people here who say that that type of regulation is stifling innovation?

BRAD SMITH: We, obviously, have had some disagreements across the pond, if you will, and we had another disagreement last week, and from my perspective that was unfortunate. You know, I hate to see a disagreement at all, and I certainly hated to see a disagreement over an issue that was sort of fundamentally technical in nature.

I think that one of the lessons that we’ve learned in this area is, frankly, the importance of persistence, not just persistence in standing up for what one believes is right, although that’s part of it, but frankly, equally, or perhaps even more important, persistence in sustaining dialogue.

You know, there are a lot of companies that had major disagreements with Microsoft for a long period of time, and with a lot of these, I was involved in the first round of discussions, and what we found was there was a lot of distrust and miscommunication. And we even found that the first time we sat down, we couldn’t reach an agreement, but we didn’t give up.

You know, we continued to talk about the issues. I’m very hopeful that we’ll all get more clarity from the European courts, from the court of first instance at some point in the next year, and that’ll help us all. You know, we’ll all know more about what the law is. But I also just think that we all have to recognize governments are here to stay. Technologies, I hope, they’re here to stay, at least for an exciting period of time. You know, and we need to sustain dialogue, and that’s what we’re committed to doing.

QUESTION: I appreciate your comment, your mention of special responsibility and commitment to transparent and accountable principles. And the principles you described today are strong and positive. They described, as I see it, more relationship with developers, competitors and corporations. My question is in the context of the user’s experience in these environments, in the light of evidence that 40 to 45 percent of the time is wasted, in terms of using PCs. How will you measure your success in that responsibility to the public? How will you show the metrics as you improve your accountability or the quality of experience for users?

BRAD SMITH: I think the focus on user experience is absolutely critical, and so I think that the question is dead on. I don’t know that these kinds of principles are necessarily the best place for us to address them, but that doesn’t mean that it’s not important for us to address them.

Computers have certainly become more secure, and more reliable, and more easy to use in, say, 2006, than they were in 1996. And yet, if we look at where we want to be in 2011 or 2016, we need to be a whole lot farther than we are now.

I do think that Windows Vista is going to help. I mean it is more secure, and it delivers more features in easier-to-use ways. We care a lot about user productivity. I think if there’s one thing that we as an industry have contributed to the economy, and this goes well, well beyond Microsoft to a number of other of the people and companies in the room. We have contributed major contributions to the productivity of economies around the world, but we need to do more. These products are still not reliable enough, and they’re not easy enough to use.

And I think, most especially, perhaps as we continue to migrate to a world of many devices, where you have the phone in your pocket, the computer in your pocket that’s on your phone, or the computer in your living room, or the computer in your car, and then the computer on your desk at the office, at home, or at work. People want to move their data around; they want to move their photos around. Kids want to move their music around, whether it’s legal or not to copy it in the first place.

So we have major technological challenges ahead of us. I’m not sure that we yet know exactly how best to measure our advances. I think this focus on measurement is a very good one. We pay a lot of attention to productivity indices, and the economy, and the studies here in Washington, among other places, that focus on IT. We pay a lot of attention to the customer feedback we get.

We as a company survey customers regularly and widely, so we get a lot of rich data coming back, and we want to continue making improvements, but this is not an area where I, personally, feel any company in our industry can say we’ve yet figured it all out.

QUESTION: Thank you. I just simply, I think the quality has improved as progress, but I think the demand and diversity of users has grown maybe faster, and so it’s important to track how that experience goes across. And so I encourage some form of metric.

QUESTION: I wonder if you might comment on the thought that perhaps security needs to be raised to the status or principle among this very excellent set of other principles?

BRAD SMITH: Well, very interesting question because when we talked about, “What are we not addressing here?” Frankly, two things that we talked a good deal about internally are security and privacy. And I think we would wholeheartedly agree that when it comes to those kinds of issues, we similarly need to take an approach that is principled, that is transparent, and that is accountable.

We didn’t think that those issues belonged as part of competition principles, but they are principles and issues that we’re very focused on addressing. And, certainly, I would say the single largest investment we’ve probably made this decade in R&D for operating systems is the investment we’ve made in security.

And frankly, the number one reason, perhaps, that we’ll see such a long interval between the first release of Windows XP and the release of Windows Vista is because there was over a year where we took all of our developers and had them create a new, what we called, Service Pack release of XP that was solely focused on security, and then we provided that to every user of Windows free of charge, around the world.

So I agree that it’s an important principle and priority that we need to address. I think, to some degree, what your question reflects is that there is an array of other important issues outside the competition space. And, yeah, it may behoove us as a company and us as an industry to think a little bit more in the same way that we’ve thought about this as to how one might best articulate the principles that we’re going to use to guide ourselves.

QUESTION: One of the thorniest issues that you have faced over the past 10 years is this question of differential pricing, that the operating system, by itself, had a particular price, and then the operating system with middleware a, b, c, d, and e, whatever they are, also had the same price. As you go forward with [Windows] Vista, is there any plan whatsoever to have any differential pricing, where the price of [Windows] Vista might be different if the OEM chooses middleware a, c, and e, and leaves out some other applications and swaps in competitive applications, leaving some room sort of in the pricing for the OEM to purchase the middleware from a third party?

BRAD SMITH: We have tried, in the design of Windows Vista, to craft different configurations of the product. So there’s basically, I believe it’s five distinct versions of the product that you might think of as sort of starting at a basic level and going up to what’s – you might consider it to be the ultimate version. And so we have done more to give OEMs alternatives among these five configurations.

You know, we haven’t, to date, thought it was really useful to create what I’ll call “a-roll-your-own” approach in an ingredient-by-ingredient basis. And mostly we haven’t done that because we want developers to have some sense of certainty about what APIs are going to be on the machine.

QUESTION: Are we to expect the OEM will have certain choices to leave out certain pieces of middleware and get a different price than if he had taken that middleware?

BRAD SMITH: I don’t know whether the thing that will divide the configurations is something that would meet the legal standard for middleware. To say – to some degree, they are definitely configurations that are important to consumers, and I think that’s what we’ve really focused on. Where is there differing demand among consumers, so that OEMs are able to meet the needs of different groups of purchasers? And we created pricing that will reflect that, and we’ll obviously finalize that as we get to the point of the product launch.

I think that the question that you’re alluding to is perhaps one of the unanswered questions that I referred to earlier, and it is part of what you might look at as some of the debate that continues in Europe. Yeah, I think it’s, from our perspective at least, it’s important to go back to this basic notion that Windows is a platform. You know, it is the foundation on which other people build. And it works as a platform because other developers are able to call on these APIs. And the thing that we’ve always worried about is the impact upon those developers if they expect an API to be there, and they therefore create an application that calls on it, and then an OEM ships a machine that has the API and the code missing.

And we sort of, we feel that if you have five configurations, and the way that we’ve created them, that’s a manageable set of distinctions, but if you have a hundred different options, then you’ve basically undermined quite substantially the certainty that the independent software developer community needs, in order to know that certain APIs are going to be there. So I think that that’s a debate that’s going to continue to evolve in Europe and perhaps elsewhere. And I wouldn’t claim that we’ve all reached the last chapter in that book.

TED HALSTEAD: To follow up on your questions, sir, a soft-ball question: Brad, you mentioned that there were still some unanswered questions out there, and it does seem that you’ve made a very conscious and impressive effort to be comprehensive in this list. But yet, it would be interesting to hear from you what you see as the biggest unanswered question out there, or another variant on this question. Is – when the analysts start digesting this, I’m sure you thought through what the reaction was like – what do you think the strongest point of pushback is going to be? Even though I think this will be widely seen as a big step forward, nevertheless, people will always push you more. Where do you think you’ll get that resistance?

BRAD SMITH: Well, I think there’s a couple of points that are worth noting, and one is that this set of principles is about the Windows desktop operating system, and about competition principles. And so people will say, “This is good, but what about the servers?” or people will say, “This is good for competition, but what about security or privacy?” And these are perfectly good and legitimate questions, and I think that we welcome the opportunity to talk about some of these other issues.

And I think another question is the one that Ken just asked. I will admit that in my experience Ken’s definition of a soft ball is usually my definition of a curve ball, you know. But that’s OK. I mean, I think that, you know, people will say, “This is good, but it needs to go farther. It needs to address when code can be removed, or it needs to address even more issues about pricing.”

And we didn’t do this with the expectation that everyone would say, “This got it absolutely right. Every person on the planet should now feel that all their questions have been answered.” I just don’t think that’s possible. I hope that what this does is create a framework that people will say, “Yes, this is a good step, and when we want to talk something about something else, we can talk about it, knowing that this framework exists, and think about how it might fit or not.”

And then, we can have a good discussion about whether an additional step is a step forward or a step backward. And of course, there’s going to be differing views on that.

QUESTION: I’m curious. This was a big announcement today, and obviously you’re very excited about this. Are you going to be doing a similar kind of announcement or will Microsoft be doing similar stuff like this in Europe at this pretty crucial time to let them know you’re announcing these principles and to try and keep that dialogue you were talking about going?

BRAD SMITH: Well, we definitely want to keep the dialogue going. That’s very important to us. And, you know, whenever you do a speech, you can only physically be in one place at one time, and I think this is the right place, in part because we have a U.S. order that is expiring at least in part next year. But, you know, we are sharing this with people in Europe and with people around the world.

QUESTION: Are you doing a road show?

BRAD SMITH: Yeah. Well, was you might expect, I started the day on the phone with people, you know, in other countries and on other continents, and I’ll probably conclude the day doing the same thing, and we have many other people who will be doing that. The goal is to have a worldwide set of principles reflecting the global nature of this technology, and it’s absolutely critical to us to move forward with these kinds of conversations with people around the world.

TED HALSTEAD: OK. We have a couple of final questions, and here’s what we’re going to do. We like doing lighting rounds at the end of New America, so we’re going to take three of you, who are going to ask you questions in a row, and then we’ll give Brad a chance to respond to all of them. So if you could keep your questions relatively brief, because we’re near the end of our program.

QUESTION: OK. Principles make no discussion of precompetitive discussion or disclosure.


QUESTION: Not many people know it, but there will be parental controls built into the new version of [Windows] Vista. How will that impact with the principles in mind, the broader Internet safety content control industry – Surf Watch, Cyber Patrol, blah, blah, blah?

TED HALSTEAD: We have another question over here. Please.

QUESTION: Of your 12 principles, homeowners are very much concerned about privacy and security. Which are the most important?

BRAD SMITH: You’ve provided the lightning. I’ll try to avoid the thunder. Number one, you’re right. It’s a good point. The principles don’t address what you might call pre-contractual disclosure or pre-release disclosure. I can certainly tell you that what we aim to do is to have very broad programs that provide developers with information about new releases of Windows very early on in the development process and on a very broad basis so that people don’t feel like anybody is being favored or discriminated against in an inappropriate way.

And that, frankly, is the kind of thing that we might even be comfortable at some point including in these principles. I don’t think we did simply because we haven’t been hearing from people as much in terms of saying, gee, I want to know what you’re doing. But I think we do have very clear and constructive practices in that area.

I think this issue of parental controls is to some degree related to what we were talking about earlier with respect to security and privacy. This is another aspect of our industry today that’s quite different from the industry five years ago. We just all have a very broad societal responsibility. And part of our responsibility is to children and their parents. And so when it comes to a product like Windows, parental controls is very important. That’s even arguably more true of say a product like the Xbox. So we keep building more technology tools in to address these kinds of things. We keep doing more things to work with governments around the world to promote child safety online, and I think we’re going to have to continue to do more as the decade unfolds.

And with respect to the last question, I think it’s a very good question. It’s a great question to end with. What in these principles should matter most to somebody who uses a computer at home? And on the one hand, I’d say there’s many things, but I would absolutely say there’s one thing above all. Users are in charge of their own machines. Microsoft will design and develop and distribute Windows so that computer manufacturers configure it. They get to choose and select the defaults, but the user will always be in charge. And I think that’s a very important thing to users around the world.

TED HALSTEAD: Brad mentioned in his comments the principle of humility, and at one point in your comments took it to the extreme of saying that Microsoft is just one company with a few products, which may be a bit of an understatement. However, I don’t think that it is an overstatement to say that this is a real historic turning point for Microsoft, and I think many in the room would commend you for that, and we look forward to hosting you back here in exactly three years I think when you come out with the next round of this.

And in the meantime, thank you all for coming, and Brad deserves a big hand.


BRAD SMITH: Thank you.