Brad Smith Press Conference Transcript: Windows Server Source Code Announcement

Transcript of Remarks and Press Conference: Brad Smith, Senior Vice President, General Counsel and Corporate Secretary, Microsoft Corporation
Announcement Related to Windows Server Source Code and European Commission Antitrust Investigation
Brussels, Belgium
January 25, 2006

DIRK DELMARTINO: Hello everybody. Thank you for coming to today’s press conference. Sorry it took a few minutes of delay, but now we are here. With us today, Brad Smith, Senior Vice President, General Counsel & Corporate Secretary for the Microsoft Corporation. Brad will make a few comments on today’s announcement, and then we will open up for questions and answers. Also welcome to the people who are joining us via telephone. So with that Brad, the floor is yours.

BRAD SMITH: Thanks to all of you for taking some time to be with us this afternoon. I’d first like to give you a small amount of context for what we have to announce this afternoon, and then I will get to the heart of it and the announcement itself.

It’s January. It’s a new year. It’s actually the eighth year of this competition case that has been proceeding in Brussels. 2006 is very clearly for us a very important year. It’s the year when the Commission’s 2004 decision will be reviewed. It’s the year when we’ll have our opportunity to stand in court in Luxembourg before the Court of First Instance. It’s the year when the heart of the matter, the substance of the case, can be presented to the Court itself.

If anything, I think that we’re more confident in the substance of the case now than we were in 2004 because we think a number of the facts that have developed since 2004 have, if anything, underscored the position that we were taking. If you think about the case itself, and frankly one of the challenges for a case that’s been around for eight years is that for many of us it’s hard to remember what the case is about.

A lot of [the focus] is on Microsoft’s integration of Windows Media Player and media technologies into Windows. These are technologies that we believe have benefited consumers and others in our industry, and for that reason we said that we thought it would be a mistake to create a version of Windows that removed those technologies. And indeed, now that we have created such a version, now that it has been on the market for many months, I think experience has proven that consumers share that point of view.

And equally important, we said that we thought that there were many opportunities for companies to go forward and innovate in competition with the technologies of Window Media Player, and that integration into Windows was not a barrier to their success. And of course if you look at what’s happened in the marketplace since March 2004 when the Commission’s decision was issued, it is impossible to avoid thinking about the success of the iPod and iTunes, and the hardware and software and services that Apple has brought to the market, and has competed those successfully with respect even to our own services.

These are issues and are of great importance, not just to Microsoft, not just to the technology sector, but to the European economy and the world as a whole. These are issues of substance that really go to the heart of innovation and future opportunities for technology innovation. That is what we want to focus on in the year 2006.

So obviously, at the end of 2005, on December 21, there was a different issue that was raised. The European Commission issued a Statement of Objection, and that Statement of Objection was really about one very specific issue. It was about the technical documentation that Microsoft has created for licensees who wish to license the communications protocols in the Windows Server operating system. And on that part of the case, which also raises very important issues of intellectual property and competition law, there is obviously a clear duty that we have as a company. We have a clear duty to comply with the Commission’s decision, even while the merits of this case are going forward.

And we will always try to work very hard to fulfill that commitment, that obligation to comply. We [thought we were] in complete compliance. In fact we continue to believe today that we were, and that we are, in compliance.

But if you think about that issue that was raised: Are the 11,000 and now 12,000 pages of technical documents that we created sufficient? Are they accurate? Are they complete? That is not the important issue to debate in the year 2006. Frankly it’s a pretty arcane debate to try to have. But more importantly it’s not the main issue that we need to focus on. And therefore we are determined not only to do a good job of complying, but to ensure that we can get to the heart of this matter and the issues that count.

And indeed that we want to take additional steps – and that’s what I’m here to talk about today – the new steps we will take to put to rest, in our view, anybody’s concern about the technical documentation that people have available to them. We have already provided, as I mentioned, 12,000 pages of technical documentation.

In addition, we committed in December to provide any licensee under the Commission’s licensing program with 500 hours of free technical support from engineers at Microsoft, so that people don’t have to read these technical documents and study them off by themselves. They can ask questions and they can get assistance.

But we certainly take seriously both the role that the Commission plays and the question of whether people have everything they could possibly need in order to understand how our communications protocols work. And to put that issue to rest, in our view, in one bold stroke, we are announcing today that we will also license the Windows source code itself, so that anybody who takes a license for this program also has access to that source code.

Why is that important? Let me talk a little bit about that, what it means and some of what it doesn’t mean.

For anybody who has used a computer, we’re just used to seeing the results of the software on screen, at least when we’re lucky and the software and the computer are both working. But obviously we also know, at least to some degree, that software consists of code. When the code is installed on your computer it consists of what we call object code, 1s and 0s, the language that a machine can understand but that a human being finds almost unfathomable. The code that people write when they create is source code. There is an example of it on the screen. Frankly, if you’re not an engineer, it may still be a bit unfathomable. But certainly to an engineer it is very, very helpful and clear. It provides all the instructions to the computer as to precisely what to do, when to do it and how.

If you think about the communications protocols that are the subject of this part of the case, these are technologies that Microsoft spent literally millions and millions of dollars to create. We then wrote source codes to implement those protocols. What we’re obligated to license, under the European Commission’s decision, is specifications, documents that describe how those protocols work. We’re not obligated to license their source code. But one thing is perfectly clear, if you want to understand these communications protocols, the source code is the ultimate documentation. It is the DNA of the Windows Server operating system. And if you have access to that source code as a developer, you can then turn, not only to the specifications that we have created, you can turn not only to the engineers and the free technical support, you can study the way in which we have implemented these specifications in our source code and use that to answer any remaining questions or clear up any remaining uncertainty that may exist in anyone’s mind.

In our industry, there is a practice that’s referred to as reference licensing for source code, and that is what we’re announcing here. When a software developer gets a reference license, you don’t get the right to actually copy the source code and paste it into your own program, but you do get the right to refer to it. You get the right to study it. You get the right to learn from it. It is clearly a very valuable right.

And when you think about the source code in a product like Windows, whether it’s on the server or the desktop, it’s a valuable product, and the source code itself is very valuable. We have provided this source code to some of our most valuable customers, to certain governments, but we have not before taken the steps that we’re taking today and licensing it on this kind of reference basis to direct competitors, so that they can learn from it when they are creating the implementations of their own protocols, even in products that directly compete with our own. So it is quite a substantial step. It’s quite a significant change from the steps that we have taken in the past.

It does not lay to rest every issue that one may raise about compliance, and I don’t want to overstate that aspect. The European Commission in December said that it was continuing to review the prices that we have established for our communications protocols. The source code doesn’t change the price. The source code is in fact provided at no additional price to anyone who signs up for a license under the Windows Server protocol program, but I’m not here to say that any question that anyone may have about pricing is then addressed simply by the licensing of source code.

Equally important, we reached an agreement to disagree with the Commission last year about the open-source use of our communications protocol. We explained that we were very comfortable pursuing hybrid development models that would enable our protocols to be used in conjunction with open-source products, like Linux, but we were not comfortable with open-source developers publishing to the world the specifications or the source code that implement our protocols. That hasn’t changed. We’re not open-sourcing Windows; we’re not permitting the open-source publication of the source code.

But we are doing nonetheless, I think, is very, very important. It has implications, as most of these things do, not just in Europe but around the world. We have protocol licensing program in the United States that relates to the Windows desktop operating system, and we generally strive to ensure consistency between the Windows desktop program and the Window Server program. So [we’re taking] these steps today and making this source code available under the Server program regulated in Europe. We decided that we will also make this kind of source code available on a reference license basis in the Untied States, under the program there for the Windows desktop protocols.

We obviously need to go forward. We have already started, just started, to provide this information with regulators on both sides of the Atlantic, who quite rightly want to see all of the details. We need to finish the work on the details and licensing terms and such. And we look forward to having a good discussion, both in Brussels and in Washington, D.C.

Obviously, this has been a long-running case, and obviously it’s not over. Obviously, we’ve had some days when we’ve been able to reach agreement with regulators. We’ve had some days when we have not. I would note that today I feel exactly the same way that I felt in March 2004 when the Commission issued its decision, and when Commissioner Monti noted that, despite our failure to agree, there was a very high degree of professionalism and respect for people who were working on both sides. I want to underscore that that is just as important to us now as it was then.

We were disappointed by the issuance of the Statement of Objections in December, but we go forward with the feeling of appreciation for the importance of the role that the case team and the other officials play at the European Commission. We want to continue to move forward to talk issues through in a constructive way with them. We want to put this compliance issue to rest. And most importantly of all, we want to get focused on what really matters here, matters more than anything else, which is the substance of this case and the importance it will play for us and for everyone else.

So thank you very much, and I would be happy to take your questions. I assume you have some.

QUESTION: Neither the Commission nor any of the programmers I’ve talked to, who were on the other side of this case, have ever said they even need or even want to see your source code. They don’t seem to think that source code and the communication protocols are connected. Can you explain then how revealing the source code is so important to ending the problems here?

BRAD SMITH: Well, I believe that we’ve already provided the kind of information that is mandated by the European Commission’s decision through the 12,000 pages of technical documentation we’ve created already. And I also believe that, if there was any doubt, if there was any ambiguity about whether we had really answered every question that people might have, we have addressed that by voluntarily, and without being asked, offering 500 hours of free technical support. So, in the first instance, I actually think that we have already done what we were obligated to do.

If you think about these 12,000 pages of technical documents, it’s of course obvious that people might have questions. But I also think, just based on common sense, it makes a lot more sense to think that people will most likely get answers, not by reading other technical documents, but by talking to other human beings, hence the focus on technical support.

To be frank, I sort of felt that this whole focus of creating ever-better technical documents was a little bit like talking, I’ll say generally, to a man who is driving, who is having a hard time finding a destination on a map, and never wants to go ask another human being for help getting there. The way life works, you usually get a lot further if you talk to somebody else. But we did all that; we did all that in November and December. Given that the Commission itself said it wanted to focus exclusively on documentation, and it was dissatisfied with the documentation we provided, it seems clear that the source code is the ultimate documentation.

I agree with you that it would be unusual to expect a developer to go to the source code first, but it absolutely is the documentation of best resort if one is confused and is trying to see how a particular protocol specification might be implemented. Provided in a secure and easy to use manner, and when you combine it with the other tools, I think unquestionably we have lived up to our duty to enable other companies to implement these protocols.

QUESTION: Today, the spokesperson of Commissioner Kroes said that the compliance of Microsoft to the decisions taken by the Commission [is] to be judged by the Commission. Do you agree with this statement from the Commission? Do you think that it’s the Commission that ultimately has to decide whether you comply or not with the offer that you are doing today? Thanks.

BRAD SMITH: That’s a very good question. The Commission indisputably plays the first decisive role in deciding whether our actions are sufficient. We absolutely respect that. And what we hope is that we’ll be able to engage in a constructive dialogue, and have the opportunity to explain how, if the question was about documentation, the source code should provide the answer.

It is of course true that we all are subject to a broader set of legal procedures and legal rules. So if there is a fine that is actually levied, that is subject to judicial review and reviewed by the Court of First Instance in Luxembourg. So the Commission plays its role. It is a critical role, we respect it, and we all have the opportunity, if everything else fails, to look to the Court as well.

QUESTION: The announcement today, how far will this address the issues now that have been raised by, not just the European authorities, but also the U.S. regulatory authorities, of non-compliance? You mentioned that you’re in talks with them. How much of this have you discussed with them? What sort of reaction have you had back from them? And will you really be able to address the issues that have been raised by both those jurisdictions?

Just a point of clarification, to make sure I understood. This 500 hours of free software support – technical support – that is still being offered? That’s still on the table and it’s all there?

BRAD SMITH: Yes, to clarify that. Yes it’s still being offered. I should hasten to add here that we are opening a door to a new step, the licensing of the source code. We’re not seeking to close any doors to any other steps. So we made the 500 hours of technical support available, and it will continue to be. Frankly, if somebody feels that more hours would be needed, we’re not opposed to having that kind of conversation. The 500 hours probably have a value to a licensee of about $100,000, so it’s a substantial service. But all of this is something that continues to evolve.

If there are other suggestions about ways to improve technical documentation, we’re not opposed to doing that kind of work either. But we are trying to make the point that if you look at the standards set by the decision, and the reasonable efforts we’re obliged to make to provide accurate and complete documentation, that clearly should be satisfied now that the source code is being made available to licensees.

With respect to your question about the reaction in the United States, it’s really too early to have a reaction. People there and here I presume are going to want to take some time to study all of this. There usually are questions about the details; those are good conversations to have.

On both continents, I think it’s fair to say that regulators, and people at Microsoft, are having to ask themselves and ultimately answer: How do we know that the documentation that is in existence is good enough? It’s a fairly specific and very detailed engineering question to try to answer. It’s not easy sometimes even to answer it, which is why I think continuing dialogue will always remain important.

But what we do know today, indisputably is this: the source code is the ultimate documentation. It’s the documentation that our own engineers created in order to implement these protocols. It should have the answer to any questions that remain, any questions that the technical specifications and the technical assistants are not able to answer on their own.

QUESTION: One of the complaints that have been doing the rounds is that this documentation that you are offering is too – not cheap – expensive. How will this licensing of the code increase the price of the information that your competitors need if they follow what the Commission is asking you to do?

BRAD SMITH: The source code that we’re offering today will be offered, as I mentioned, at no additional charge. So, if someone pays for a license they will get, as part of that initial price, the right to access the source code. This will cover all of the source code and implements all of the communications protocols covered by the European Commission’s decision. It won’t raise the price; it won’t reduce the price. It will, I think, increase the value. So I think that’s clearly of some importance.

But I would say more generally, we’ve put together a licensing structure under the U.S. program. We have about two dozen licensees who have come forward, who have entered into license agreements. The pricing structure in the United States is very comparable to the pricing structure in Europe. And perhaps most importantly, one of the things we’ve always said is that prices typically are arrived at by companies talking together, and if there is a company that wishes to license a part of the technology or all of the technology, but it doesn’t think that the price for the offer that it is interested in is set quite right, we’re certainly prepared to sit down and talk about that, and we’re prepared to have a conversation and enter into a negotiation. That’s how prices get set in any kind of market. Even though this is a regulated program, and as a regulated program that effectively creates a market for our communications protocols.

QUESTION: The pricing question – I think my understanding from the Commission is a bit more complex. One of the investigations, of course, about whether you’re going to be fined €2m a day, half of that has to do with how you’re going to set your pricing. It’s unclear whether you can charge at all for the protocols. You say that patents are covered – Commission isn’t sure of that. Doesn’t this guarantee that people might not feel that they would have had to pay will now have to pay? That’s the first part of it.

The second part is, if you’re sure that this will resolve things and will solve things, why did you come to us rather than coming to the Commission? Then you could have simply said, “We’ve got it solved.”

BRAD SMITH: Let me answer the second question first. Over the eight years of this case we’ve had a lot of conversations with the European Commission, and I’m sure we’ll continue to. But we also need to recognize that the character of the discussion changed on December 21, with the public issuance of a Statement of Objections.

We’re not at all – believe me – we’re not at all opposed to having more private conversations. But those private conversations, by definition, are less private when they’re in the context of a public Statement of Objections.

To be honest, especially when we saw the steps that we took in December, being rejected before the Commission staff even had an opportunity to review them, it was clear that it’s important to have both a good private discussion and a good public dimension to this as well. It now is a public issue.

With respect to the pricing, well like about anything, it can be made as simple or as complicated as you’d like it to be. That is, to some degree, the nature of technology, and frankly it’s often the nature of legal issues as well.

The basic question, or at least I should say one of the basic questions, that the Commission put to us was whether there was genuine innovation in these communications protocols. So one of the things they asked us to do in November was to provide documentation that could be reviewed. We provided literally thousands of pages of documentation that were responsive to those questions. They were interested in knowing exactly what patents applied, they wanted a list from our engineers of all of the specific innovations in each of the specific protocols. They were interested in a library, if you will, of prior art against which our innovations could be compared.

We’ve never taken the position that absolutely every element of every protocol is innovative – that’s clearly not the case. But I am equally confident that there is a tremendous amount of well documented, innovative advances in this broad array of protocols, and we’ve now provided information so that the Commission itself can make a determination.

QUESTION: You said that you think that you have been in compliance with the Commission’s March 2004 decision. However, the monitoring trustee, who you yourself suggested, has delivered a fairly scathing verdict on your efforts so far. How do you respond to that?

BRAD SMITH: Well, we obviously have a difference of opinion on that. Once we had the chance to study carefully the report of the monitoring trustee, who we also strive to work with in a very constructive way, one thing did stand out, I must admit, for us. The trustee said that he had undertaken a project to try to create the implementation for one of these protocols, and he tried over the course of four days to establish such an implementation, and he was not able to do so.

Well, the reaction of our engineers was that even our best engineers couldn’t have accomplished that in only four days. It took us years to create this technology. It cost us millions of dollars to develop it. It is not something for which any important piece can be replicated by anyone else with just four days of work. So, in a sense, we feel that that’s not the right question. The question isn’t whether something can be created that then can be implemented in only four days. It’s going to need a team of engineers, even with access to all of this information. And it’s going to take a good deal more than four days for anybody to succeed. That just can’t be the right test.

QUESTION: Just a quick technical question. You’re talking about the source code only for the Windows Work Group Server software, not for the Desktop PC operating system?

BRAD SMITH: What we’re talking about is licensing, under the European Commission’s program, the source code for the Windows Workgroup Server operating system. We are, as I mentioned before, also announcing today, because of our desire to see consistency between the two programs, the licensing of source code for the Windows desktop operating system. And in both cases this will be the source code that implements the communications protocols that are covered by each program.

QUESTION: But not the general desktop PC? Not the entire source code for the desktop PC operating systems?

BRAD SMITH: No. There’s no reason under either program to license every line of source code under either program. The purpose of each program is to enable developers to implement the communications protocols. So what they’ll see is the source code that implements the communications protocols.

QUESTION: I just had a separate question. You talked about you wanted to get down to talk about the substance. The dates for the hearings for the case have been set now. You appeared to suggest that the world had moved on, certainly in the last eight years, and possibly since March 2004 in terms of innovative development. What reasons do you have to think that you have a stronger case, given that you lost the case on the interim measures last year? Why do you think you’ve got a stronger case going into this hearing?

BRAD SMITH: Well the interim measures hearing was all about whether we would suffer irreparable harm if these remedies were put into effect. The basis for that decision was not a lack of confidence in the merits of the case, which is not to say that the Court necessarily endorsed the merits of our position either. It was simply a decision that was based on its conclusion that we would suffer no irreparable harm.

I do think that technology continues to move on. I think if anything it is clear that there are more opportunities for competitors today than there were two years ago when the Commission decision was issued. But that doesn’t make this case any less important. This case is going to establish the law that will determine when companies that have popular technology products can integrate new features into them. This case will determine the law that will govern when companies that have popular products must license their technology and intellectual property to direct competitors, even in the same market.

These are the kinds of questions that will shape not only our industry, but frankly every industry for years to come. Given the obvious great importance that the European Union plays in the world, this is a decision that will impact not only Europe, it will impact the global market place as a whole.

It is those questions that we look forward to having a continuing conversation. Now that we have dates for a hearing it is clear that we can start to focus even more on those issues, and we’ll have the opportunity to all, I hope, focus on what this decision is really about.

QUESTION: You’ve chosen today, which was the original deadline for replying to the Statement of Objections, and that’s now been extended. You’ve got a three-week extension. But you’re also talking about the need for the Commission to study this at some considerable length. So in your estimate, what is the state of play now with regards to the Statement of Objections and the threat of fines? Do you think they should be lifted effectively?

BRAD SMITH: I don’t believe that the imposition of any fine is warranted, but that, too, is not a decision that we get to make. We will go forward, and we’ll complete our work to file our response to that Statement of Objections that is due in mid-February. Assuming that this process continues, we’ve said that we will ask for a hearing, and that hearing would need to be scheduled by the Commission. I hope there will be an opportunity for discussion about the specifics of the source code license. I hope that the Commission will make a decision in the context of this new offer, which I do believe addresses in a single stroke any lingering question anyone may have about whether developers will have access to the most accurate and complete technical information they need.

Thank you everybody.