By Jon Fortt
September 17, 2007

Below is a Microsoft-supplied transcript of the Brussels press conference General Counsel Brad Smith held today. In it, he talks about the company’s next steps, and mentions some other companies that might be affected by the EU decision.

QUESTION: Are you going to appeal?

BRAD SMITH: We have not made that determination.  We have barely finished reading the decision once.  This is the kind of decision one needs to read a few times and reflect upon before making that kind of decision.  We have plenty of time for that kind of thinking, so it is not something I want to address today.

QUESTION: Where are the other complaints filed against Microsoft (MSFT) going to go, now that the Commission has quite a good precedent behind it?  Have you had any kind of contacts with Commissioner Kroes today?

BRAD SMITH: I called the Commission this morning to convey my congratulations for those portions of the decision which it won, which were considerably longer than the portion that we won.  I will not describe anything further, or even who I spoke with, but it was appropriate and important to do that.

Only one other complaint has been filed to date at the Commission with respect to Microsoft.  That was filed by a group that represents IBM (IBM) and one or two other companies.  They were focused on requiring that we license other communications protocols relating to our SharePoint server and Exchange server, and some other products.  We have conveyed our willingness to license those technologies.  As a matter of business policy and approach to the industry, we are prepared to license to others in our industry, on reasonable and non-discriminatory terms, the technologies that are important to interoperability.  If there are specific questions that people have, I hope they will come to us.  They can always go to the Commission first if they wish, but they will make more progress if they come to us.  We are open for business when it comes to licensing technology and intellectual property rights that are important for interoperability.

QUESTION: I have a point of clarification: the fact that you are going to take additional steps to comply with the decision does not mean that you are withdrawing your right of appeal, if I understand correctly. Second, from what we heard from Commissioner Kroes this morning, this has a lot to do with your dominance in the market, given that 95% of personal computers on the market run on Windows.  Do you expect your dominance in the market to decrease, perhaps at least in Europe, as a result of this decision?

BRAD SMITH: First of all, I am not saying anything today on any appeal.  We need to think about this: it is a serious and substantial decision and it deserves serious thought, rather than an instantaneous decision on what to do about something like an appeal.

There are always important questions under competition law about how one thinks about the goals of competition policy.  I completely agree with the proposition that the purpose of competition law is to promote choice, to protect consumers and to encourage us all to offer better products.  I hope that Microsoft and other large companies will continue to have the opportunity to offer better products to consumers, and I hope that consumers will continue to have the opportunity to choose our products if they believe that we genuinely provide the best offering on the market.  Market shares tend to go up and down – sometimes they fluctuate a lot; sometimes they fluctuate a little – but the rules of the road need to stay constant.  Today’s decision helps to specify what some of those rules are, but I genuinely believe that these are rules that speak more to how one competes than who should win the race.

QUESTION: Have you spoken to Bill Gates and, if so, what did he say?

Second, why are you charging for this interoperability information anyway?  It has been said that it is a bit like a telephone company charging another telephone company for technical information to allow them to route calls through to their customers?  Why are you charging them for this?

BRAD SMITH: I have had a chance to be in touch with several people in Washington State, where it is about six o’clock in the morning.  People are just getting up there and they have not yet had an opportunity to even read as much of this as we have.

We have always tried to explain – sometimes successfully and sometimes less so – that there is a tremendous amount of energy, time and creativity that goes into the creation of these technologies.  This is not a telephone book; it is over 8,000 pages of technical specifications that took us millions of dollars to develop.  The documents themselves represent intellectual property in the form of patents, copyrights and, as today’s decision reflected, trade secrets that, under the 2004 decision, are also accorded the same weight as those other intellectual property rights.  Telephone companies, in fact, are typically permitted to recoup costs when they engage in genuine innovation and investment.

Of course, it also has to be a system that works for everyone.  The prices have to be ones that are reasonable – hence the requirement in the 2004 decision – and they have to be offered on a non-discriminatory basis.  However, the decision itself did not specify that the only reasonable price was zero.  Our goal is to be in complete compliance with this decision.  We will look to the Commission, among others, for guidance.  We want to do the right thing but I am not necessarily here to urge us and other large companies in our industry to all sign up to the proposition that innovative technology should be free simply because it may be relevant to interoperability.

QUESTION: So you are committed to charging –

BRAD SMITH: I am committed to complying with the Commission’s decision.

QUESTION: How swiftly do you think you can take these additional steps that you talked about to comply with the original March 2004 decision?  Do you fear that, en route, there may be another hefty fine on its way for your company?

BRAD SMITH: It is not our desire or our goal to have continued arguments or disputes.  We want to move forward, in compliance with the 2004 decision.  There are a number of things that are not spelled out explicitly in the decision itself.  I am hopeful that we can have the kind of conversation that will enable us to know with confidence what we must do and what we can do in other areas, and I am hopeful that we can do that very quickly.  I would also underscore that I am hopeful that we can take not only the kinds of steps with respect to something like pricing, but also pursue other initiatives with others in our industry – the kinds of initiatives that will make clear and real our commitment to work with the rest of the industry to promote interoperability.

QUESTION: You stressed good relations with the Commission, but today Mrs. Kroes used rather harsh words in her press conference.  She said that today’s verdict is bittersweet because, on the one hand, it confirms the Commission’s position but, on the other hand, it also confirms the serious damage that Microsoft’s illegal behavior brought to both business and consumers.  Can you comment on the Commissioner’s words?

BRAD SMITH: I do not want to get into a debate with anyone at the Commission.  I would point out that we continue to work in a very dynamic industry.  The Media Player issue is fundamentally about the future of digital media.  Look at the world of digital media today: Apple (AAPL) has something like a 70 percent market share for digital music; iTunes is far and away the leading source for music on the internet; the iPod is far and away the leading hardware device for digital music; and Adobe (ADBE) Flash is far and away the leading Internet-based technology for the streaming of media, which was, in fact, the very issue that was the focus of the 1998 complaint that started a lot of the Media Player issue.

I would, then, look at that part of the market and suggest that the market is moving forward and consumers are benefiting from a lot of choice.  It is true that Apple does not license its communications protocol for the iPod or iTunes, yet it certainly does not appear that the market has been held back by Microsoft’s incorporation of Windows Media Player.  Similarly, I would look at the server market.  Windows Server has done well, but has not grown as quickly in recent years as Linux has.  It is a dynamic market that has been entered by new entrants.  They have done well and I expect that they will continue to do so.  None of that is intended for a moment to suggest that we can afford to fall short of our obligations under this decision.  We need to live up to the kinds of obligations that the Court and Commissioner Kroes reflected upon, and we are committed to doing so.

QUESTION: Would you expect the Trustee decision to affect past and future non-compliance fines?

BRAD SMITH: I have had a chance to read the Trustee portion of the decision once and I would like to read it more than that before reflecting on what that means for the nature of any process or the future.  I think Commissioner Kroes had a similar comment.  We all need to read this and to think before we formulate opinions and decisions.

QUESTION: You said that the decision does not mean that you have to charge zero for your server software protocols, but the Commission claims that the criteria the Commission would apply have been upheld by the Court.  Do you see this differently?

BRAD SMITH: I should be clear on two things: first, with respect to the interoperability information and technology and intellectual property rights in this decision.  I was not talking before about the decision; I was talking about interoperability technology in general.  We will look to the guidance of the Commission and will absolutely listen as carefully as possible to the guidance we receive.  I mentioned that we had dropped the price quite substantially and, if that price is, in the Commission’s view, still too high, it will be very important for us to understand what price is low enough, so that we can conform to all of our obligations.  There is a lot more to the world of interoperability information and technology than the information and technology in this decision, and I was talking more broadly before.  I am not trying to rule anything in or out.

With respect to this decision as a whole, we are all going to have ample opportunity to think about what it means for Microsoft, and for our industry and every other industry in the world.  The decision very clearly gives the Commission quite broad power and discretion.  There are many companies in our industry that have a very large market share.  People talk about Windows with 95 percent, or our server share of 60-80 percent.  As I mentioned before, Apple has a 70 percent share for digital music in Europe; Google  (GOOG) has a 70-80 percent share for search – in some countries in Europe, it has over a 90 percent share.  IBM has 99-100 percent share for mainframe computers in Europe and the rest of the world.

Information technology tends to be an industry that is characterized by successful companies having large market shares.  Sometimes, those market shares last; in many others instances, they are fleeting.  It is very clear that we all have the need to look to Europe and the European Commission under the terms of this decision, and it is equally clear to me that this decision will occupy, as it should, the thoughts and discussion of many people, not just in the weeks ahead, but in the months and years to follow.  It is one of these decisions that have that kind of extraordinary impact. Thank you very much.

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