Brad Smith: Ruling of U.S. Court of Appeals for the District of Columbia Circuit on Antitrust Settlement Remedies

Transcript of News Conference Regarding Ruling of U.S. Court of Appeals for the District of Columbia Circuit on Antitrust Settlement Remedies
Brad Smith, Senior Vice President, General Counsel and Corporate Secretary, Microsoft Corporation
Wednesday, June 30, 2004

BRAD SMITH: Thank you for coming this afternoon and thank you to the many people who are on the phone. Obviously, as you know, the Court of Appeals in the District of Columbia issued its opinion this afternoon ruling unanimously that the Consent Decree negotiated with the Department of Justice and nine states [in 2001], and then coupled with a District Court decision for the remaining states, is upheld. So in short, the court today issued a very important ruling. It has made clear that Microsoft and the rest of our industry can now move forward with this decree and judgment in place.

Of all of the steps that Microsoft has taken in the past two years, I believe this is the most important in resolving the legal issues in the antitrust area. If you look at our work over the last two years we’ve made many strides forward. We have resolved disputes with our competitors, we have settled the high majority of state class-action decisions, and yet until this decision from the Court of Appeals was in place there was still an important question mark remaining about the continuing impact and longevity of the District Court’s decision and the settlement decree.

We’re obviously very gratified with today’s decision and we’re pleased that it takes another very significant step forward in adding legal clarity and putting the issues of the past behind us.

We’re also very pleased with the decision today and its specific focus on the issue of code removal. As you know, here in the United States as well as in Europe and elsewhere, competitors and regulators have been focused on whether it would make sense to remove software code from the Windows product in order to promote the interest of competitors.

The District Court looked at this issue in great detail in the proceedings before it in 2001. Today’s unanimous decision by the Court of Appeals strongly affirms the prior decision by the District Court. Today’s unanimous decision strongly affirms the principle that removing code from Windows is neither necessary nor helpful for our industry or consumers. To the contrary, the Court of Appeals made clear today that removing software code from Windows would be a huge step backwards, not only for Microsoft but for the rest of our industry and most importantly for consumers. We believe that this judicial affirmation is a very important part of today’s decision.

But finally I would say by way of introduction that we also need to keep all of these issues in context. As a company today, Microsoft is a year and a half into a five-year Consent Decree and judicial judgment. As we come to work tomorrow morning we need to stay focused on job number one, which is the continued implementation and successful operation of the consent decree and judgment that were established in 2001. We need to ensure that our employees continue to come to work focused centrally, as they are, in complying with all of our legal obligations in each and every respect.

So while today’s decision is a very substantial step forward and makes important progress in providing clarity and putting longstanding issues to rest, it doesn’t change what was the dynamic this morning and will remain the dynamic tomorrow, that here at this company we need to stay focused as we are on complying with our legal duties and implementing each and every provision of this Consent Decree and judgment in a successful manner.

So with that by way of introduction, I’d be happy to answer questions, be happy to start if there’s questions in the room and then we can move to questions from people on the phone.

QUESTION: (Off mike).

BRAD SMITH: The question, for those of you on the phone, in case you could not hear it, is whether today’s decision is likely to have any impact on the case in Europe or the fine imposed by the European Commission.

I think it’s important to keep in mind two things. First, we need to respect the judicial system and process in Europe. It’s a different continent, it has its own laws, it has its own judges, and government officials there will make and are making their own decisions. We respect that, and we look forward to the judicial process unfolding in Europe.

But second, I do think and I do hope that people in Europe and around the world will pause and perhaps take a bit of time to read today’s decision. After all, today’s decision addresses many of the precisely same questions that are front and center in Europe.

If there is a single question that is at the forefront of the case in Europe today, it is whether removing code from the Windows product would advance or rather harm the interests of consumers.

Today’s decision is a unanimous decision by six judges, by one of the most important and prestigious courts in the United States. It is based on an exhaustive record and trial testimony that took place before the district court.

As this court today concluded, removing code from Windows would hurt consumers rather than help them, it would hurt the software industry rather than help it. That’s true in the United States; as an issue or question of fact there’s really no reason to think that the answer should be any different in any other country. The facts are the same and we hope that as judges around the world and government officials around the world examine this question they’ll give this some serious thought.

QUESTION: (Off mike).

BRAD SMITH: The question is whether, given the strength of the ruling, we are anticipating an appeal. That’s obviously a question for Attorney General Reilly to answer for the state of Massachusetts, and I have no doubt that he and his staff will want to take the time, I would think, to read the decision and they’ll make a considered judgment. So the short answer is, we don’t yet know.

I would underscore that throughout this proceeding and especially throughout the last couple of years as this has gone up on appeal we’ve benefited from the ongoing opportunity to have a very professional dialogue with Attorney General Reilly and with his staff. We certainly hold Attorney General Reilly and his staff in the highest regard. We are hopeful that there will come a time when we can work in a collaborative way on ensuring the success of the Consent Decree that was negotiated and the judgment that was entered by the District Court. But in terms of the next step, that’s obviously Attorney General Reilly’s decision to make, it’s not ours.

(Operator Direction.)

BRAD SMITH: I guess I’m being told I need to let the operator know that now is the time where we’ll take questions from people on the phone. We may have to wait for a couple of seconds for that to be queued up.

(Operator Direction.)

QUESTION: Brad, some people on Wall Street think that ending this uncertainty is kind of like the last impediment and the last impediment to Microsoft doing some bold sort of corporate moves along the lines of a stock buyback or something like that. Obviously you’re probably not going to announce very much before its time, but maybe you could address whether this thing was at all tying your hands and can free you to do more things.

BRAD SMITH: Sure, Don, good question. Obviously John Connors is the person who has been speaking and will continue to speak, together with Steve Ballmer and Bill Gates, about our financial issues and our financial reserves. I do think it’s fair to say that we were very focused on waiting for this decision from the Court of Appeals, and today’s decision, especially in such strong terms, does remove the last area of legal doubt that we were considering as a factor before we felt that we could move ahead with decision-making with respect to the company’s financial reserves.

John Connors has said previously that the company’s goal is to make an announced decision with respect to the financial issues by the end of July, by the time of the company’s annual financial analyst meeting. I do think that today’s decision removes the last legal impediment to the company’s ability to make these types of decisions, and therefore I think it’s fair to say that this helps keep us on track to meet the kind of timetable that John Connors announced previously.

(Operator Direction.)

QUESTION: Brad, is there any uncertainty in the fact that the ruling did permit the two trade organizations to go forward with searching for tougher sanctions?

BRAD SMITH: No, Ted, I don’t think that there is any uncertainty, at least for Microsoft or for this case. Certainly what the court did is it considered the issues that were raised by the two trade associations, but just as the court unanimously ruled in Microsoft’s favor with respect to each and every issue raised by Massachusetts, so too the court ruled unanimously in Microsoft’s and the Department of Justice’s favor with respect to each and every issue raised substantively by those two trade groups.

So I think with respect to this case and the antitrust issues that have been front and center for Microsoft for the last six years this decision is a landmark decision. It removes any remaining legal uncertainty. It makes it clear that the settlement and District Court decision were appropriate, they were fair, they are pro-competitive and it enables Microsoft and our entire industry to move forward with the continued implementation of the obligations that the District Court put in place.

QUESTION: Your critics say that nothing has changed in the competitive landscape since the settlement was announced. Do you see it that way?

BRAD SMITH: Not at all. I think it’s a very good question and it’s a question that the Court of Appeals addressed directly today. I think it’s very clear, as the Court of Appeals said, that the District Court’s decision addressed the heart of the competition issues, but it did so in a way that is sensitive to the needs of consumers and the interests of our industry. And I think as you look at our industry today you see that, in fact, in place.

One of the most important, perhaps the most important issue in this case was the creation of additional competitive opportunities for other software companies that are creating so-called middleware, products like instant messengers, products like media player, products like Java and the Java Virtual Machine.

The media player issue I think is a classic example of the way that this decree has worked successfully. Look, for example, at the success of Apple and iTunes. Look at the fact that Apple has sold over 75 million songs in the last year. It’s doing so with media formats that are not ours, it’s doing so with its own media player, not Microsoft’s.

Look at the success of a company like MusicMatch, which announced the very same day that the European Commission issued its decision in March that it had obtained an all-time high in market share for its media player.

Consider, as we submitted to the court in Europe during the last week, the fact that each and every large PC manufacturer in the United States and Europe, meaning every manufacturer that has more than 2 percent market share, is installing on the same machines on which it puts Windows media players from other companies as well.

I think the digital media market is a very good example of a market that is characterized entirely by dynamic opportunities for new as well as existing competitors.

That is precisely the type of issue that this case and this settlement and this District Court judgment were designed to protect. And I think as today’s decision shows, there is a settlement in place that is working, it’s creating opportunities for competition and it’s doing so in a way that advances rather than impedes the needs of consumers and that at the end of the day is what antitrust and competition law are all about.

With that, we’ll take a couple more questions.

(Operator Direction.)

QUESTION: Yes, hello, Brad. This settlement is approved but the judge who approved the settlement has said that it has not had the intended effect as quickly as it should. I guess how would you address that criticism?

BRAD SMITH: Good question, Kristi. I think one needs to think about a variety of issues with respect to the settlement. The settlement, in fact, has over 15 different significant operative provisions and the only area where the government has focused in the last year about things not working as quickly as it might have hoped is one area, the area of communications protocols. It’s worth keeping in mind that what the settlement required Microsoft to do, namely license these valuable technologies to others, is, in fact, something that had never been done before. So it was very important for us to do a lot of new work and do it in a collaborative way with all of the government officials rightly involved in supervising our work closely, and I think we have made very important strides forward.

The number of licensees, companies who are now taking this technology, has quadrupled in the last year, it’s moved from four to 16, and certainly the signing of a license by Sun Microsystems earlier this year is a major step forward.

We here at Microsoft have been very focused on taking a number of additional steps aimed at implementing the communications protocols provisions successfully and to ensure that this is ample time for the rest of the industry to make use of this technology we voluntary agreed earlier this year to make new technologies available in this area through 2009, even though the decree required that we do so only through 2007.

So I think that when one puts all of these things in perspective it is true that doing something this new and this important did require that we all learn together about how to take new steps but I also think it’s clear now that this provision is working, I think that’s reflected in today’s decision and it will continue to work not only through 2007 but in some important respects we’ve committed to provide technology even longer.

Next question.

(Operator Direction.)

QUESTION: Brad, could you just comment on how the code removal provisions in this opinion will affect discussions about that as far as Media Player goes? I mean, how do you view the code removal issue for IE and Windows applying or not applying in the media player market?

BRAD SMITH: Well, it’s a good question, Drew, and I think what is important to keep in mind is that the code removal issue is now being reviewed by other governments on other continents, and we need to respect the fact that other countries have their own laws and they have their own processes and officials in place to review these issues and make decisions.

It’s hard, however; all of these government officials in these various parts of the world are fundamentally asking the same question, and that is whether removing code from a successful product like Windows will be beneficial or instead harmful to consumers and to competition. And so while the laws may differ and the officials may differ, the reality factually, obviously, is the same throughout the world, and this is a single market worldwide when it comes to people making technology available over the Internet and then using that on their PCs.

What today’s decision makes clear I think is that a very thorough review in this country, first by a number of government agencies, then by a District Court and now by a six-judge panel of one of the most important courts in this country in a unanimous ruling, has concluded that removing the code from Windows would be a step backward for consumers, for our industry and for software developers.

And what we hope is that perhaps people around the world will at least take a few minutes to consider the fact that these courts have issued their rulings, while at the same time we completely respect the fact that they will, of course, need to and will make up their own mind as to how they want to answer these questions.

Just a couple more questions.

(Operator Direction.)

QUESTION: Given that the U.S. case was primarily an illegal-protection-of-monopoly case, I’m wondering if you could comment on what the company’s sense of the state of operating system competition is today versus what it was when the case was brought?

BRAD SMITH: Well, it’s a very good question, Jonathan. It’s worth putting ourselves in the shoes for a moment of where we all stood in the spring of 1998 on that day in May when the Justice Department and a number of states filed this lawsuit. And one way to take the temperature of where things stood that day is to go back to some of the events that unfolded in the courthouse at the trial that took place just a few months later.

And you might recall that during the trial one of the points we made was that Linux was going to emerge as an important product and source of competition in the operating system market. And there were many doubts by people in the courthouse that day, including many doubts expressed by people covering the trial who questioned whether that was really the case. And yet here we stand six years later and I don’t think you can find anyone in our industry who would doubt for a moment that a product like Linux is and will remain for the long term an important part of the operating system universe.

And, of course, when it comes to Linux it’s not just one product from one company, it is a common kernel that is being applied and built upon by a number of companies in our industry, whether it’s companies like Novell and Red Hat or other companies, including in other countries.

Certainly we see that vibrant competition every day and it’s absolutely doing a good job of keeping us on our toes and that’s a good thing. And certainly as we look to the future we don’t see that dynamism in that part of the market going away in any future that we can conceive or imagine.

QUESTION: Hi, Brad. I’m just wondering if there is any part of the opinion where the court is rejecting the states’ proposal to remove code that you think is most important and perhaps will warrant the most serious consideration or weight in Europe? Does that make sense.

BRAD SMITH: Actually if you look at, sort of, pages, I think it’s 15 to 18 or thereabouts. That’s where you see the court’s discussion of code removal and you see the court discussing specifically what the District Court concluded and you see the District Court —

(Operator Direction.)

BRAD SMITH: — on page 18 in which the Court of Appeals reflects upon the fact, I think approvingly, that the District Court found specifically that the removal of code from Windows would be, and the specific words were, “Significantly harmful not only to Microsoft but to Independent Software Vendors, ISVs, and the consumers.”

And you see the court continue to discuss that issue and, I think, contrast that proposal with the proposal that the government established and the District Court approved, namely to open up competition, as the government did, to require Microsoft to make a number of technical disclosures, to require Microsoft to add features in Windows, to require Microsoft to change its contracts with PC manufacturers in a manner designed to enable other companies that have these so-called middleware products more easily to distribute those products to consumers via the OEM channel.

And I think that is all a very important part of this decision and it really takes us back to the point I was making before; if we look, for example at the media player market and the digital media market more broadly, who could discount for even a second the dynamic nature of that market when we see the success of Apple, when we see the success of MusicMatch, when we see the variety of media players that are, in fact, being distributed on new PCs, not only in the United States but in Europe and around the world?

I think that’s it for questions. So with that, I’d just like to thank all of you very much for joining us this afternoon, and as people continue to reflect on these issues we’ll be happy to answer your questions, so thank you.