Brad Smith: Microsoft on the European Commission Market Testing Announcement
Oct. 07, 2009
Conference call: Brad Smith, General Counsel, Microsoft Corporation, regarding the European Commission’s decision to market test a set of measures Microsoft has offered to address competition law issues relating to Windows, Office and other high volume products. Redmond, Wash., Oct. 7, 2009

Brad Smith, General Counsel, Microsoft Corporation, regarding the European Commission’s decision to market test a set of measures.
Via Conference Call, Redmond, Wash., Oct. 7, 2009

(Operator Direction.)

KEVIN KUTZ: Hello, everyone. This is Kevin Kutz, director of Public Affairs for Microsoft. Thank you for joining this call at such short notice.

As I think you all know, the European Commission has made an important announcement today with regard to our proposals concerning Internet Explorer and Windows, as well as the interoperability of several of our key products.

I have with me Brad Smith, who is Senior Vice President and General Counsel for Microsoft. He will make a few comments, and then answer any questions that you have.

We recognize that you're all on very tight deadlines, so we wanted to organize this call to give you the opportunity to ask questions and get answers very rapidly.

If you have additional questions afterwards, if you need to follow-up for whatever, please feel free to contact us via our PR teams in Redmond and Brussels.

Brad, over to you.

BRAD SMITH: Great. Well, thanks, Kevin, and thanks everybody for dialing in. Let me just give you a real quick overview, a few comments, and then, as Kevin said, I will be happy to answer your questions.

We're very pleased by today's decision. As we indicated, we welcome the announcement by the European Commission to move forward with formal market testing of Microsoft's proposal relating to Web browser choice. We welcome the opportunity to move forward with the next step on interoperability as well.

As you saw in the Commission's statement, which was released a little bit earlier today, this follows the proposals that we published in July. The Commission received very broad feedback from throughout our industry, particularly in August. That included feedback from browser vendors, hardware manufacturers, trade and consumer associations, and the like.

As a result of that feedback, we had extensive discussions with the Commission over the course of the last month. We agreed to make a significant number of changes to improve our proposals, and we believe that we've been able to do that.

We've really worked hard to ensure that our proposals address fully all of the competition law issues that have been raised.

I'll spend a moment just to touch upon each of the two proposals.

The first, as you know, relates to Web browser choice, and I would highlight three aspects of that proposal in particular.

First, the proposed measure ensures that PC manufacturers will continue to be able to install any browser on top of Windows, and make any browser the default.

Second, it ensures that PC manufacturers and users will be able to turn Internet Explorer on and off, even putting the code that executes the IE browser frame into a separate cache on the hard drive.

Third, the measure ensures that for the next five years in Europe PC users who are running Internet Explorer as their default browser will receive a ballot screen or a consumer's choice screen that will enable them to easily download and install another browser if they would like. That ballot screen will be displayed automatically on a user's PC. PC users can make any other browser the default. If they prefer, they can turn Internet Explorer off, although they don't need to turn IE off in order to use another browser or to make it the default.

The interoperability measure will last for 10 years. In many respects, it's even more expansive. It covers a wide variety of Microsoft products, as you may have heard Commissioner Kroes mention. It addresses the Windows desktop operating system, Windows Server, Office, Exchange, and SharePoint.

I'd highlight three aspects of the interoperability measure in particular.

First, it is designed to ensure that developers throughout the industry, including open source developers, will have access to technical documentation to assist them in developing products that will work well with Microsoft products. These focus in particular on technology that's important to interoperability such as communications protocols, for example.

Second, Microsoft will be required to support certain industry standards in its products, and to fully document how these standards are implemented. This includes the industry standard file formats in Office, including the standard that Microsoft developed, Open XML, as well as ODF, the Open Document Format. It also involves standards implementation in the browser and the like.

Finally, and I think this is perhaps especially significant, under the interoperability measure Microsoft will make available legally binding warranty agreements that other developers can purchase for in effect a nominal sum, and then there will be privately enforced, enforceable warranties in place so that if Microsoft fails for any reason to live up to its obligations, there are measures that are available to others in the industry.

This very much adopts a policy prescription in effect that Commissioner Kroes outlined in her speech in June of 2008. In this speech the commissioner outlined an approach for promoting interoperability for high volume products in the software industry, and with this interoperability measure I believe we've fully addressed all of the objectives and all of the pieces of that policy path.

Finally, I'll just offer a couple of thoughts in closing, and then we'll turn to questions. For Microsoft, today's decision takes a big step towards closing a long chapter of antitrust issues in Europe.

There remains one last step in the formal process to finalize the complete settlement of these issues, and we hope to take that last step before the end of the year.

As you know, we've been working to address these issues for many years. We're very pleased that this day has finally arrived, and we look forward to working hard to complete this process. We're hopeful that we will do so, as you've heard, before the year comes to an end.

So, with that, I'd be happy to answer any questions you have.

(Operator Direction.)

JAMES KANTER: Thank you. Hello, Brad. James Kanter in Brussels.

I just wonder whether the settlement decision, the commitment decision at least on the browser case, I'm not sure we're as clear on what form the interop settlement will take. How much does this help Microsoft now focus on one of its next big challenges, which is confronting the challenge posed by Google, both in Washington and in -- both in the United States and in Europe? Thanks, Brad.

BRAD SMITH: Hi, James. A couple of thoughts. I mean, first, it is very important for us to resolve the competition law issues that have been on the agenda for over a decade. I think today's decision represents a big step towards that objective. It's not complete yet. But I'm hopeful that we're reaching a point where we now have real clarity, certainly in Europe, both for what we need to do on interoperability and for these issues around Internet Explorer.

I don't think that hurts, and it probably helps as we address some other issues. It's certainly important for us, for example, to continue to work through the regulatory process for approval for our agreement with Yahoo! That is sort of objective number one, if you will, in the search market for us. We believe that Microsoft and Yahoo! need to come together to create a scale that can create real choice for consumers, and more rapid innovation in competition in the search marketplace.

You know, we're certainly at a very different point in our industry today in terms of competition law issues for information technology. Five years ago, when people talked about competition law and IT, they tended to talk almost exclusively about Microsoft. I think a lot of that was because of the uncertainty and the controversy around issues that we're now moving towards closure.

In contrast, today the agenda is much broader. There is a lot of focus, as there should be, around the competition law issues in the search market. We certainly have our concerns about the lack of competition in search and paid search advertising, and we've been explicit about that. There are issues about the mainframe market. There are issues about other mergers in the marketplace such as the proposal involving Oracle and Sun.

It's a different industry. It's a broader agenda. I think clarity and closure in some issues enables all of us to think about the broader set of issues for the future.

JAMES KANTER: Thank you.

(Operator Direction.)

CHARLES FORELLE: Hi, Brad. It's Charles Forelle in Brussels.

Two questions, if you can oblige me on that. The first is regarding the ballot screen. Can you explain why it wasn't possible to have the ballot screen be an application as opposed to a Web page in Internet Explorer, which certainly necessitates Internet Explorer being there before all the other browsers?

And the second question is, can you clarify for me what exactly the interoperability stuff is legally? I mean, there's no statement of objections in this case as far as I know. What exactly are you doing with that? Is it some sort of maneuver to end the case before a statement of objections, is there a statement of objections and we don't know about it? Just what is it legally? Thanks.

BRAD SMITH: Sure. Hi, Charles, happy to answer both questions.

First, I've always thought that this question of client code versus a Web page for the ballot screen has been a real red herring. The real issue is what features do people want and when do they want to see it invoked, and then the implementation of that is left to software engineers, as it has been in this instance.

Well, the first thing to know about the ballot screen is that it displays only if a user is using Internet Explorer as their default browser. This was a specific issue that was discussed with the Commission in July.

Certainly our competitors did not want users to see this ballot if they were using someone else's browser as their default. We at Microsoft would have been happy to display a ballot screen in those instances as well, but that is not something that our competitors have been advocating.

So, there's nothing I think unusual about displaying a ballot in Internet Explorer for a user who is using Internet Explorer as their default browser.

Then you just get to the question of should the actual features in the ballot be displayed as a separate application that runs on the client machine or on a Web page. Certainly a Web page is easier to update. One needs to keep in mind that we have to localize every update in multiple languages.

So, from our perspective it really just became a question of what features did people want. If we could implement the features that people wanted in a Web page, that was probably the best way forward. As it turned out, we were able to do so. So, that was the basis for continuing down that path.

On the interoperability side, there is no statement of objections. We have not received one.

We are offering a public undertaking. This undertaking is very much of the sort of undertaking that companies have offered to the European Commission and DG Competition, in fact, for a number of years. If you look back at the IBM undertaking in 1984, if you look at the undertaking that Microsoft offered in 1994 relating to OEM licensing, this is a longstanding practice. And in this instance I think it's fair to say, although you should certainly ask the Commission, that it was the appropriate measure, given that there was no statement of objections.

CHARLES FORELLE: Just to be clear, do you anticipate that this means that this case, the ECIS [European Committee for Interoperable Systems] case is over?

BRAD SMITH: I think that's a question to put to the Commission. Certainly from our perspective we have addressed in the proposed undertaking all of the relevant issues that were raised by ECIS complaints. And I think if you look at the undertaking relating to interoperability, one is really struck by the breadth that it covers, both with respect to products and second with respect to issues.

I think the one other point to underscore on the interoperability undertaking is that while it doesn't have the same formal application that an Article 9 decision of the Commission does, in fact it creates a self-enforcing mechanism in the form of these warranty agreements that can be obtained by our competitors and others in the industry.

If you look back to Commissioner Kroes's speech in June of 2008, one of the things she highlighted was the desirability of creating mechanisms so that there would be binding obligations on companies in our industry, but then the industry could rely on those mechanisms in a way that were legally enforceable and did not always require the Commission to have to devote resources to every single issue. And, in fact, that's precisely the mechanism in this undertaking, given the nature of these warranty obligations and the ability of other companies to rely on them.

CHARLES FORELLE: Thanks very much.

BRAD SMITH: Sure.

(Operator Direction.)

MATTHEW NEWMAN: Hello, Brad. It's Matthew Newman from Bloomberg.

Two quick questions. The first one, just following up from what Commissioner Kroes said to journalists about an hour ago, she said that there's now trust between her and Microsoft. And two years ago, you might remember that there were talks between Steve Ballmer and Kroes, which did not resolve the issues. In fact, Commissioner Kroes decided to launch two new cases in January 2008 after not believing that Microsoft would fulfill its side of the bargain to resolve the issues. What changed in the last couple of years? Why is there now trust after all these bitter arguments?

And on Microsoft-Yahoo!, I understand it is a priority for you. I just want to know when you're going to notify that case to the Commission, or if you're not, are you going to notify to national competition authorities in Europe?

BRAD SMITH: Good questions, Matt. Let me start with where we are in this matter.

We have worked very hard over a long period of time to strengthen our relationship with the European Commission. It's heartening for us to see the progress and to see the much better relationship that I think exists today.

It's taken a substantial amount of time, in part because the issues are broad and quite complex. I think they're complex technically and they're complex legally.

As you pointed out, we had some extensive discussions late in 2007. Those did not reach an agreement. But I think on all sides we really endeavored to keep working at it, and that's what we did. Sort of stands for the proposition that if at first you fail, it usually makes sense to try, try again.

And so we've had extensive discussions really over the last couple of years. We've been able to use those discussions to understand better what the Commission's objectives and concerns have been. We've been able to work to clarify the issues. We've been able to work creatively to take additional steps.

We've spent a lot of time talking with each other. Just over the last four or five months we had almost 20 videoconferences between Redmond and Brussels. So, in effect we've spent a lot of time in what has felt like the same room, even if it wasn't always the same room on a literal basis.

And I think out of that we've been able to reach the point where we are today, where we have something that I think works for the industry, it works for competition law, and we think we can apply it in a way that our engineers can implement.

So, I do think it creates a much stronger basis to move forward, and it's certainly heartening for us to have this better relationship. It's something that we're very focused on sustaining and continuing to improve as the years go forward.

With respect to Microsoft-Yahoo!, as we've said, we've put the question to the European Commission as to whether it believes it has jurisdiction over the agreement or whether the jurisdiction instead lies with the national authorities. We've certainly started down the road of providing substantive information about the agreement. We are awaiting a determination by the Commission as to whether they do believe they have jurisdiction. If they do, then we'll go forward as this progresses, and at the right time we'll formally notify the agreement in Brussels. If the conclusion is that the Commission does not have jurisdiction, then we would notify it instead with national authorities, the most significant national authority likely being in Germany, because it is clear that the German authority would have jurisdiction if the Commission does not.

I hope that addresses that.

MATTHEW NEWMAN: Yes, thank you very much.

(Operator Direction.)

SHARON CHAN: Hi, Brad. Thanks for taking this call. I just wanted to clarify what this means for Windows 7? Does it ship with Internet Explorer, and then the ballot screen shows up for the European version? Thank you.

BRAD SMITH: Yeah, good question. Yes, this announcement today means that Microsoft will continue to be able to ship the same version of Windows 7 to all consumers around the world. That's a significant step for us. It's certainly something that PC manufacturers made very clear that it was important to them. It means that European consumers will get all of the same benefits that consumers elsewhere in the world will get.

In addition, consumers in Europe will then receive shortly after they get a new PC or install Windows 7 an update that will be delivered to them over the Internet via Windows Update, and it is that update that will launch the code that will display this consumer choice screen or ballot screen that is obviously an important part of this proposal.

I think it was an important and even creative step we were able to come to together with the European Commission to focus on Windows Update as the delivery vehicle, if you will. By using Windows Update we simplify life for PC manufacturers. They don't have to deliver this. They can continue to configure the PC however they want. They can configure another browser as the default if they prefer. They can turn IE off if they wish. But if IE is the default on a Windows 7 machine, then the code delivered via Windows Update will display this consumer choice or ballot screen.

SHARON CHAN: Thank you.

BRAD SMITH: I think we have time for one more question.

(Operator Direction.)

AOIFE WHITE: Actually my same question was the Windows 7, so let the next question come up.

BRAD SMITH: Okay, thank you.

KEVIN KUTZ: I think that's it then.

BRAD SMITH: All right. Well, thank you all. I know for some of you it's like an unbelievably ridiculous early hour in the morning, so thanks especially, but thanks to all of you in Europe who have been following this for so long.

As I've said, today is an important day. It's a day that we've worked towards realizing for a long, long time. It's not the last day for this process, because as we've mentioned there is an additional step that needs to be taken. But nonetheless we're very pleased that this day has arrived. We're very committed to continuing to work towards the completion of this process, and we look forward to continuing to invest in our relationships across Europe, and continuing to focus on addressing competition law issues as they arise in the future as well.

So, thank you very much.

KEVIN KUTZ: Thank you all.

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