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Transcript: Steve Ballmer/Brad Smith News Conference with U.S.-based Journalists Regarding European Commission Ruling

Steve Ballmer, CEO, Microsoft Corporation
Brad Smith, Senior Vice President, General Counsel and Corporate Secretary, Microsoft Corporation
News Teleconference with U.S.-based Journalists Regarding European Commission Decision
March 24, 2004

An audio replay of the news conference will be available until 5 p.m. PST (8 p.m. EST) March 31, 2004.

Replay Call-In Numbers:

United States: (888) 568-0924
International: +1 (402) 998-1591

(No pass code is required for either of the replay numbers.)

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OPERATOR: (Operator direction.) I'd like to turn the call over to your conference host, Mr. Mark Murray. Sir, you may begin.

MARK MURRAY: Thank you, operator, and thanks very much for joining us all. We realize that it's an early hour for some of you on the West Coast, given the time differences with Europe. We wanted to make sure that we reached as many journalists as possible while they were still available to affect their deadlines.

So we are going to get started right away. I have with me Steve Ballmer, our chief executive officer, and Brad Smith, our senior vice president and general counsel. This call is being recorded, so there will be a replay, and we'll provide you with that replay information at the end of the call.

Let me now turn it over to Steve for some opening remarks.

STEVE BALLMER: Good morning, all, and thanks very much for joining us today. I'm glad to have this opportunity to provide the thoughts and perspectives on the European Commission's decision which was announced earlier today in Brussels. We have a great deal of respect for the commission, its authority and its processes. At the company, we've worked extremely hard with the commission over many, many months to arrive at possible remedies for their concerns.

As many of you know, I spent most of last week in Brussels, because we believed we were really on the verge of an agreement that would resolve the issues in this case without the need for litigation. In the end, although we had agreed on steps to address all the issues the commission had in the current case, the commission nonetheless decided to pursue the much riskier course of litigation. We think that's unfortunate, but we respect the commission's decision, and we will move forward with the next steps in the process. Frankly, we remain hopeful that at some point we may be able to resume those discussions, reach a mutual resolution of these issues.

We think, though, when people look at the facts they will realize that the settlement that we had proposed was a much better solution for consumers, and for the future of our industry, than what the commission announced today.

There's an important principle at stake in this case. We believe that every company should have the ability to improve its products to meet the needs of consumers. We recognize the special position our company has; but, nonetheless, we think we should have that ability to improve our products subject to the appropriate guidelines.

The settlement we proposed would have addressed the commission's concerns in this case, but also protected our ability to improve our products.

Our research shows that a majority, a very broad majority, of European consumers believe that Windows Media Player should be included with Windows. Similarly, European consumers want greater functionality and greater ease of use. Even though we didn't get the settlement we wanted, I'm proud of the efforts we made to try to reach that positive settlement while protecting the fundamental principle of innovation.

As the legal review process begins, we remain 100-percent committed to our customers and partners in Europe. We will continue to invest in new technologies to address the needs of people and businesses everywhere, and we will continue to bring out innovations to our partners and customers.

Frankly, as this case moves forward, you can be assured that we will respect and fully comply with European law as we are respecting and complying with the regime in place under the consent decree here in the United States. We will continue to work with the commission and a broad set of European governments on a range of technology issues, from security, privacy, education to protecting our children online.

Thanks. I would now like to turn the discussion over to Brad Smith, our general counsel, who can give you a little bit more detail and additional thoughts.

BRAD SMITH: Thanks, Steve.

I wanted to add just a couple of points. First, as we confirmed, we now will move forward with the legal process in Europe. We will file our appeal in accordance with the timetable set by the European Court of First Instance, and we will ask the court to suspend many or perhaps all of the sanctions that the European Commission ordered today. We haven't yet received the full text of the commission's decision. We'll need to receive it, we'll need to study it, and then we'll make a decision with respect to precisely which of the sanctions we'll ask the court to suspend. We will definitely ask the court to suspend a number of the sanctions, including the code-removal sanction that was addressed in the Media Player decision today.

We think that today's decision is a step in the wrong direction. It's an unfortunate step and it's an unnecessary step. The U.S. government spent over five years addressing these issues, and at the conclusion of that process it put in place the consent decree that addresses these issues, including Windows Media Player. The Department of Justice put in place a regime that created new opportunities for our competitors and new opportunities for PC manufacturers to install competing media players, and change the default setting on PCs, and even remove end-user access if they wish to our Windows Media Player.

If you look at the marketplace today, it's clear that a great many PC manufacturers are availing themselves of that regime, and in fact new PCs are being shipped with competing media players on them already.

In contrast, the code-removal approach that the commission pursued today is an approach that in our view will help a small number of competitors -- at least that is its theory -- at the expense not only of our innovation but at the expense of consumers as well. And it's worth noting that the same competitors that have sought this outcome in Europe also sought it in the United States. They encouraged the states' attorneys general to ask the District Court in Washington, D.C. in 2002 to issue a code-removal remedy. And the District Court in D.C. listened to over 60 days of testimony from witnesses, and then issued a very considered opinion. The court rejected the precise code-removal remedy that the commission has endorsed. And in rejecting that remedy the court said three important things.

First, the court said, and I quote, that "innovation would be stifled" with this type of approach.

Second, the court said, and again I quote, that "this would disrupt the industry, harming independent software vendors and consumers."

And, third, and I quote, the court said that this would cause, quote, "clear and certain harm to the entire personal computer ecosystem," unquote.

So our competitors had their day in court, and it's unfortunate that after that day came and went they simply chose to move across the Atlantic to try to have a day in another court. And we think it's especially unfortunate that the European Commission today embarked on a remedy that shows so little regard for the work and decision-making of the U.S. government, and so little regard for the comity proceedings or processes that are established under the commission's 1991 treaty with the Department of Justice. This is a case that started in the United States. Microsoft is an American company. The complainant companies are American companies. The software is designed in the United States, and the U.S. government dealt with the issues thoroughly. There was no need for the commission to disrupt that regime with this conflicting approach in which it's embarked today.

In addition, there was no need for the commission to do this, given the settlement proposal that we offered last week. We offered, as we said, a proposal that would have ensured that new PCs that come with Windows installed on them would also come with three additional competing media players. That is a recipe that would have helped competitors, but wouldn't have done so at the expense of consumers. Consumers would have gotten more value for their money and more software on new PCs.

In contrast, the remedy that the commission has embarked on today seeks to help a small number of competitors by punishing a large number of consumers. It requires us to produce a new version of our software that offers fewer features and less capabilities for consumers.

Even if one takes away the multimedia code and, as RealNetworks has suggested, installs its player in its place, there will remain over 20 features in the Windows operating system that will not function. There will remain many European Web sites that will not function properly, and there will remain European software developers that have products on the marketplace today that will not function on PCs that have that code removed.

Clearly this is something in our view that, as the District Court recognized, is fundamentally going to be harmful to consumers and to our industry as a whole. We believe that there are important benefits to consumers when new features are integrated into software. And while we recognize, as Steve said, that we have an important responsibility under the law, we very much believe and hope that governments and courts will look at these issues with a broad perspective that makes consumers part of the equation. We don't believe that that has really happened today.

We go forward therefore with the litigation process. We remain fully committed to Europe and we're optimistic as we go to the courts. We'll work hard to retain good relationships with the European Commission and with governments across Europe. But at the end of the day, we do believe that there are important principles at stake, and even though the litigation process may well last four or five years, we think those are principles that are worth standing up and defending.

So with that, that's our initial overview.

MARK MURRAY: Thanks very much, Brad, Steve. And, Katie, we're now ready to move into the phase of this call where we'll take questions. So if you could let reporters know how they can line up for questions, and we'll take a number of questions, as many as we have time for.

(Operator Direction.)

QUESTION: Hi, guys. Steve, two questions for you. One, will this affect earnings in any way, short-term or long-term?

And, two, do you think the company went too far? They're pretty firm in their statement that you guys abused your monopoly. Do you think you did abuse the monopoly you have?

STEVE BALLMER: Let me comment to both. First obviously there is a number of fines. I don't know if you're counting treatment into the fine -- I am sure I will learn here in the next 24 hours what the accounting treatment is for a fine that's being appealed. But the concrete and obvious impact to earnings will come from whatever the accounting treatment is on the fine. Obviously there is additional work and expense that would be required to comply with the decision, assuming the decision is not stayed in the Court of First Instance.

The second question: We have recognized our new obligations in the world. We understand the position that we have. We understand the obligations that we had not only under the consent decree, but under the guidance that we got from the District Court and the Court of Appeals that essentially tells us we have to look to consumer benefit and we have to consider potential harm or issues for competitors as we integrate new technologies into Windows. We're doing that. We're doing that every day. We're complying with the consent decree. Every day we come to work and we do our jobs. The Media Player issue was considered. Nobody considered it an abuse of any position to include the Media Player in Windows. That was, as Brad said explicitly, taken up by the U.S. courts -- no abuse. So I feel quite good that what we've done meets the test of being pro consumer and affords under the consent decree plenty of great opportunity for competitors. So I guess I would say no, I disagree with that -- let alone the fact that this investigation has been going on for five and a half years and taken the commission five and a half years to come to this point of view. So obviously one has a hard time seeing that they thought it was a serious abuse, or they would have moved more quickly.

MARK MURRAY: Operator, next question.

(Operator Direction.)

QUESTION: Yes, both Steve and Brad, you didn't characterize your reaction to the new requirement with regard to the sharing of server code, and I wondered if you could comment on that.

BRAD SMITH: Well, we'll need to take a close look at that once we get the decision. I would expect that we would ask the Court of First Instance to suspend at least a significant part of that remedy. To the degree that the remedy duplicates the obligations we are under in the United States, we obviously wouldn't ask the court to suspend that part, because we are already doing it in the U.S., and we're doing it in the U.S. that makes it available to people worldwide.

To the extent that this goes beyond the U.S. regime -- and it clearly does -- I would expect that we would ask the court to suspend that part of the relief.

Certainly on the interoperability side and on the code removal side, we think that today's decision amounts to the broadest compulsory licensing of intellectual property rights since the European Community was founded. And given the nature of a compulsory license, once you give things to people, you can't really get them back. They've already made use of them. And so we think that there's a very compelling logic to ask the Court of First Instance to suspend all of the remedies that amount to a compulsory license. And in our view there is a very substantial compulsory license not only on the interoperability side of the case, but on the code-removal side of the case as well.

QUESTION: Brad, how many companies has Microsoft shared its code with under the Justice Department's consent decree?

BRAD SMITH: It's on the order of a dozen that have signed licenses to implement the specifications. There's other companies that have signed evaluation licenses, and I don't have the exact number of that. So they've already seen the protocol specifications, but they haven't yet signed a license to implement them.

STEVE BALLMER: Yeah, to be clear it's a license for specifications of the protocols, not the code itself.

BRAD SMITH: That's right.

MARK MURRAY: Okay, Katie, ready for the next question.

(Operator Direction.)

QUESTION: Yes, two questions of Mr. Ballmer. One is you don't say whether you hope for more discussions with Europe at some stage. Given the discussions you've already have and where we've gotten to, is there anything that gives you any hope for that, and at what point might that happen?

And the second question is a financial one. You've talked in the past about not sharing any more of your cash revenue with shareholders until some of these issues are resolved. Does this mean that your business model is still potentially under threat, and therefore everything will now be on hold in terms of the cash distribution?

STEVE BALLMER: Let me take the second question first. We do not have clarity. We have more clarity than we did yesterday, but we don't have clarity in terms of what the business impact will be of the European Commission action. We haven't read the ruling, we don't know exactly where we stand, so I think it's just premature to speculate how that might impact our thinking about cash strategy, if you will.

The first question related to potential future settlement discussions. I think, as Brad indicated, as we get into the appellate process in the Court of First Instance, I'm sure there will be intermediate milestones where we will get some kind of guidance from the court and perhaps with additional guidance from the court it will give additional clarity to both us and the Commission in terms of potential paths for constructive settlement.

BRAD SMITH: Yeah, it's worth remembering the process that we went through in the United States. In 1999, before there was a decision from the district court, there was a very intensive mediation process supervised by Judge Posner in Chicago as the mediator. Everybody worked incredibly hard, but ultimately it wasn't possible to come to a settlement at that time. The case went forward and then the Court of Appeals issued its decision in the summer of 2001. That decision added substantial clarity as to what the state of the law is in the United States. And once that decision was issued, it was possible to go forward and the case was settled within four months.

One can never predict the future, but it would not surprise us if the path in Europe were to follow something similar to what we saw in the United States.

Okay, Katie, we're ready for the next question.

(Operator direction.)

QUESTION: Hi. I have a question for Steve first. Is there anything you expect to do differently now that this decision is out in terms of your long-range strategy for planning products and planning upgrades to Windows?

STEVE BALLMER: No. No, I would say not, and we think the guidance given by the consent decree in the U.S. and by the appellate court in the U.S. are still the guiding principles for us as we design kind of new versions of Windows with great new features, great new opportunities for developers, but also provides a way to think about how we have to enable competitors to compete on the merits, so to speak.

The remedy suggested by the Commission may be different, but the Commission seemed to, to me, at least in its press conference, go out of its way to take pain to support at least the framework of innovation from the U.S. government. Where they got off on the remedies is very confusing to me. Maybe I'll let Brad add more, but certainly we're not doing anything different than we were doing yesterday in terms of how we think about new design. What we were thinking yesterday was influenced, of course, by the consent decree and the regime here in the U.S.

BRAD SMITH: Yeah, if I could just add to that, I mean, we've had lawyers already giving legal advice to our development teams about the development of future versions of Windows, and that advice takes very clear account of the court of appeals decision in Washington and of all of our obligations under the consent decree.

So the reality is that that advice would change if and only if the European Commission is now saying that the law in Europe is different from the law in the United States. We haven't yet read the negative decision, we haven't yet received it, and so we really won't know until we have the chance to read it.

What we do know is two things: One is Commissioner Monti took some pains in the press conference to suggest that, in his view at least, European law and U.S. law are consistent, but number two, the remedy that is being pursued is vastly different and really conflict with the remedy in the United States.

So we'll have to take due account of the Commission's decision, and we'll have to see if their reasoning is different from the reasoning in the U.S. If it's the same, then we'd probably just continue to be very careful, as we are, to incorporate that thinking into the decisions we make.

QUESTION: Thanks. And, Brad, if I just may ask one follow-up, did the requirements under this decision go further than the settlement talks than you were willing to go with the release of technical information for interoperability?

BRAD SMITH: I don't yet know. We haven't had a chance to read the part of the decision to know that.

QUESTION: Thank you.

MARK MURRAY: Operator, I think we only have time for about two more questions, so go ahead and let's see if we can squeeze two in.

(Operator direction.)

QUESTION: Yes, hi, thanks. This is for anybody who wants to answer it. In terms of server interoperability, I think, Brad, you said the E.U. remedy goes beyond the U.S. one. Can you explain a little more in what respect does it exceed the U.S. settlement and why those additional disclosures would be a threat to your intellectual property?

BRAD SMITH: Certainly, with the caveat that the details are critical and we haven't yet had a time to study them, I would say this.

The U.S. regime addressed the protocols that are in our client operating system, and they were designed to ensure that they could be use in other people's server operating systems. And there is a principle in competition law that basically looks at downstream or adjacent markets, and it says that at least some courts have said that it is more appropriate for a competition law to go farther in terms of having an impact on a secondary market.

The Commission's case doesn't do that, though -- I mean, at least not entirely. It focuses on the protocols in our server and it is designed to enable those protocols to be used in other people's servers that directly compete with our own.

And so that's a very different situation. It's basically like saying to a newspaper that you've got to make your articles available so they can run in other people's newspapers, even though you know that those newspapers are going to be sold in competition with your own.

So the effect on intellectual property rights is much more substantial in that kind of situation, and European courts have based a great focus on that distinction, and so that will be an important part of what we'll argue.

Certainly the technology is very valuable, the protocols are very valuable. These protocols are protected by patent rights. The specifications are protected by copyrights. It's all protected by trade secret rights. So the impact on our intellectual property rights is quite sweeping.

I would also say the impact on our IP rights with respect to code removal is quite sweeping in two key respects. First, the code-removal remedy amounts to a compulsory license of the Windows trademark. The whole purpose under the law of having a trademark is to convey a message to consumers that a particular product has certain characteristics and certain qualities. And Windows today is a trademark that applies to a state-of-the-art operating system for state-of-the-art computers, including the broad range of multimedia capabilities. It's clearly going to cause confusion for consumers and dilute the value of our trademark if we're ordered to apply that trademark to a product that, whatever it is, is clearly not Windows. And so we'll argue that it's really unprecedented for a government to seek the compulsory license of a trademark in this way.

And, in addition, it amounts to a compulsory license of our copyright, which gives us the exclusive right to create an adaptation of the Windows product as instead we're being ordered to create a derivate work that the European Commission is designing instead.

So there will be many important IP issues that will be presented to the Court of First Instance. They also raise critical issues under the European Commission's international treaty obligations in the World Trade Organization and we'll raise that aspect of the issues as well.

MARK MURRAY: Great. We probably have time for one more question.

(Operator direction.)

QUESTION: Hi. Good morning to you. Good afternoon for me here in Washington.

I just wanted to ask quickly, just following on that last question I guess, you argue that there will be harm to consumers and yet I think that it could equally be argued that the software industry and computer industry change very rapidly and I can't imagine that there could be sort of technical changes to recover from the changes that would be ordered by this decision.

But in addition, it seems -- I'm not sure what philosophical term you would apply to an argument such as this, but it seems an argument that you could contend to say that if, in fact -- and I know you would not say this -- monopolistic practices were used to create a consumer dependence on a product and, in fact, that sort of perception of the trademark that you just described, that any change to that, based on law and the desire to change monopolistic practices, would, in fact, of course, it would have a negative impact on consumers who had been given only one choice, so to speak.

So I wondered if you could at least speak to that sort of argument, and could you please also address the question that some have tried to raise that the EU might have been acting in a way that could encourage growth of its domestic industry in an attempt to sort of weaken the U.S. hold on that industry, if there is one.

STEVE BALLMER: Well, let me just comment on the second and then I'll let Brad handle the first.

This was a matter between -- the complaints were brought by U.S. companies against the U.S. company at the Commission. I don't think there's anything in this decision that would have facilitated growth and development of European participants in the computer industry. In fact, I'm quite sure our settlement proposal had more in it that would have benefited the European industry than this remedy did. So I disagree with the Commission respectfully, but I don't think that was the sort of driving motivation, at least in this specific decision, who knows about the future.

Brad will take the first question.

BRAD SMITH: Yeah, and I would just underscore a couple of points. I mean, look at the marketplace that exists today. This is a world in which anybody on the call hasn't any difficulty in obtaining an alternative media player. I mean, in all probability if you buy a new personal computer, you're going to find that it already has alternative media players installed on it, in part because of the regime put in place by the U.S. government in the consent decree. And if it doesn't, is there anybody on the call that would have any trouble downloading an alternative media player in a matter of minutes? Clearly hundreds of millions of people have already done so. Even RealNetworks acknowledges that it has 300 million users around the world.

This is not a world in which consumers are lacking in choice for multimedia software tools. Choice is everywhere. If somebody thought that there needed to be even more choice, then clearly I think the right thing to do would have been to settle the case on the terms that we did offer last week, namely that every new PC in the United States and in Europe would have come next year with Windows, if Windows were installed, and three additional media players. You'd have four media players on every new PC. That must be enough choice for consumers.

And so instead the Commission has embarked on a very different course. The kind of choice they want to create is the choice between Windows with high-quality features and a version of Windows in which those multimedia capabilities are removed.

We are not hearing consumers tell us that that's a choice that they want. Consumers want more value for their money, not less, and yet that is precisely the outcome that the Commission has ordered. Under the order there will basically be these two versions, if it's implemented. They will cost exactly the same amount of money and one will do more and one will do less. That is not the kind of help that consumers in Europe or the United States are looking for the government to provide, in our view.

So we are, I think, strongly of the view that this moves things in the wrong direction. We will still remain very committed to Europe. An important thing that we do is work not only with European governments but with European software developers. There are many European companies that build on our multimedia technologies, even the Media Player technologies. So we'll have to figure out new ways to work with them and we'll remain as committed to Europe as ever, even while we think that this is a huge step in the wrong direction.

STEVE BALLMER: I want to end with one last comment, and then I'll pass things back to Mark.

We do absolutely recognize the world in which we operate. We recognize the position that the court and the consent decree states that we have and what that means in terms of additional obligations and responsibilities as the significant player that we are in the marketplace.

And in all these discussions with the Commission, with all of the work that will happen now in front of the Court of First Instance, we're not trying to step back from that. We've stepped up to our obligations to comply under the consent decree, to live in the new regime, the new responsibilities on our company. And our reasons for being here today, as opposed to having reached a settlement, have far more to do with the specifics that Brad discussed than they do any lack of recognition on our part of our unique responsibilities and obligations, both to consumers to innovate, to software developers to create opportunity, and to competitors to allow them a fair and open opportunity to also do their good work. And if there's one last message I'd leave you with, it would be that.

MARK MURRAY: Thanks very much, Steve and thanks to Steve and Brad for making the time available this morning.

Thanks very much and a transcript of this call will be posted on the Microsoft PressPass Web site within a couple of hours. That's Microsoft.com/presspass, all one word. So feel free to contact us in corporate communications if you have any questions or avail yourself of those materials.

Thanks very much and this would conclude the conference call.

NOTE TO JOURNALISTS:

An audio replay of the news conference will be available until 5 p.m. PST (8 p.m. EST) March 31, 2004.

Replay Call-In Numbers:

United States: (888) 568-0924
International: +1 (402) 998-1591

(No pass code is required for either of the replay numbers.)

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