Bill Gates is testifying today in the Microsoft antitrust case. Here's the five-page executive summary: http://www.politechbot.com/docs/gates.testimony.summary.042202.pdf Here's the 163-page full version (1.1 MB): http://www.politechbot.com/docs/gates.testimony.042202.pdf I've included some excerpts below. Even if you believe that Microsoft should pay a price beyond what the Justice Department extracted in the settlement, it's hardly obvious that the litigating states' proposal is a good one. Their plan (which they hope the judge will approve) smacks of something written by competitors out to advance their private interests, not the public interest. The unintended consequences (or, cynically, the intended ones) seem to be legion. See below. Previous Politech message: http://www.politechbot.com/p-03417.html -Declan --- 10. As explained in Section III, the NSPR would undermine the Windows platform, to the detriment of all who benefit from it, in many different ways. In fact, the NSPR would hobble Microsoft as a competitor and innovator across many product categories because many of its provisions are broadly worded to apply to any Microsoft product, service, feature or technology. 11. Aside from these concerns, it would be extremely difficult, if not impossible in some cases, for Microsoft to comply with the NSPR. Many key aspects of the NSPR, particularly its definitions relating to "middleware," are vague and ambiguous, providing Microsoft with no clear statement of its obligations. Other aspects of the NSPR simply could not be feasibly implemented. Many provisions of the NSPR lead to extreme results, but Microsoft would not have the freedom to construe the NSPR in ways that we find less extreme. Microsoft is committed to complying fully with Court orders, including any remedy that may be ordered in this case. We can do that only if the remedy is clear as written and its terms feasible. We recognized that to make the Altair and other microprocessorbased devices useful, they were going to need software. I left college, and Paul and I founded a company to develop great microprocessor software, which we called Microsoft. It was not much of a business in its early years, just Paul, me and a small group of developers we hired banging out code day and night in spartan offices in Albuquerque, New Mexico. But it was a labor of love. In short, if the Windows platform were to fragment, the primary value it provides—the ability to provide compatibility across a wide range of software and hardware—would be lost. Windows would no longer offer an efficient platform to ISVs because Windows would not consist of any single platform on which ISVs could rely in developing applications. (See Demonstrative Exhibit 1.) 70. As software programs became more costly to develop and offered fewer new innovations, consumers would have less incentive to buy new PCs. The same "positive feedback loop" that propelled the PC industry to years' of steady growth would work in reverse, causing the industry to stagnate as products became more expensive to develop even as they provided fewer benefits and less interoperability. Over the years, Microsoft has worked to ensure that products from a variety of companies work well together. Indeed, I believe that Microsoft has done more to promote interoperability among computer products than any other company in history. In the software industry, some information about competitors' products is available, and other information is protected by IP laws. If Microsoft's competitors were permitted to implement many of Microsoft's innovations in their own products without regard to Microsoft IP rights, Microsoft would have little it could uniquely offer the marketplace. No firm can do unique R&D in the software industry absent significant IP protection for its work. There are three key aspects of the NSPR—the breadth of the covered product categories, the vagueness and ambiguity of many of its most important provisions, and the feasibility of complying with various of its requirements—that are especially alarming to me. I believe that these aspects of the NSPR would make it extremely difficult for Microsoft to understand the requirements of the NSPR, to comply fully with the requirements it does understand, and to continue to deliver new technologies to the marketplace. In short, the practical effect of the NSPR would be to cripple Microsoft as a technology company. Section 8 provides another important example of ambiguity in the NSPR, made worse by the very broad scope of the provision. Do the non-settling States really mean that Microsoft should not take any action that directly or indirectly adversely affects any third party based on the fact that the third party is competing with Microsoft in any product category? That would seem to rule out ordinary business practices. 61 Given the tightly integrated design of Windows and the complexity of the product, Microsoft cannot ensure that "the binary code for each Microsoft Middleware Product" could be removed without degrading the rest of the operating system. To the contrary, removing the binary code for "Microsoft Middleware Products" will degrade the rest of the operating system—every function that depends upon the removed software will fail. Indeed, Microsoft would face an immediate crisis if the NSRP were entered because Section 1 would prohibit Microsoft from distributing any Windows Operating System Product after six months that does not comply with the requirements of that section (unless an extension could be obtained from the Court). We could not comply with Section 1 in six months for the following six reasons. 231. Wholly apart from the many problems identified above, the pricing provisions of Section 1 would create a disincentive to developing improved versions of Windows. Rather than earn a return on our substantial investment in improving Windows, any improvements could result in a revenue loss to Microsoft. In fact, under the pricing formula set forth in Section 1, the price of Windows could be zero. That pricing regime also could not feasibly be implemented, for the reasons set forth below. At a minimum, every OEM would have a strong incentive to "remove" the "Browser" software from Windows, earn the price reduction that would flow from our roughly $100 million in annual development costs for that software (very roughly, 15% of the cost of developing a desktop version of Windows), then add back a free version of the exact same "Browser" software made available under the compulsory, royalty-free source code licenses for Internet Explorer provided under Section 12. Over the ten year life of the NSPR, OEMs' perfectly rational decision to swap out then add back identical "Browser" code would result in revenue loss to Microsoft of roughly $10 billion. Under such a pricing scheme, why would any rational business enterprise in Microsoft's position continue to invest in Web browser innovation, whether as part of Windows or separately from Windows? 272. Over the long-term, modifications to Windows by individual OEMs acting in their short-term self interest would present a classic tragedy of the commons problem. Just as a lake that is fished too heavily soon will support no one, the PC ecosystem as a whole will suffer if the stability and consistency of Windows is not maintained, for the reasons I discussed above. When PCs become less reliable because the quality of Windows has been compromised, when consumers must undergo retraining to operate different brands of PCs because of differences in their user interfaces, when applications written for one version of Windows will not run on another version, the entire PC ecosystem will suffer. Free Access to Microsoft Source Code. Like most other commercial software vendors, Microsoft generally seeks to limit access to its source code. Source code reveals product innovations. For example, a competitor who is free to review Microsoft's source code (as Section 4.c permits under the misleading heading "Compliance") will see the architecture, data structures, algorithms and other key aspects of the relevant Microsoft product. That will make it much easier to copy Microsoft's innovations, which is why commercial software vendors generally do not provide source code to rivals. 324. Third, Section 4 would make it hard for Microsoft to develop new versions of Windows—especially when read in conjunction with Section 5. Creating a new version of Windows to improve performance and fix bugs requires writing a lot of new code, which eliminates many internal interfaces and changes others. Under Section 4, however, such interfaces would have been disclosed, and third party software developers may have relied on them. If Microsoft changes the interfaces, software programs that rely on them will no longer operate properly, which would make Windows less appealing as a platform and trigger potential violations of Section 5. 116 341. Here are just a few examples of beneficial business contracts that apparently would be banned by Section 6.a.: · Microsoft's online service, MSN, provides co-marketing money to a retailer to promote the MSN service on "end caps" on store shelves. The retailer is "restricted" from promoting competing online services on end caps—that is the placement for which Microsoft is paying. · Retailers may promote Microsoft's game console with advertisements stating that a hot new game is available "only on Xbox." Microsoft's agreement with the game ISV "restricts" the ISV from offering its game for a period of time on competing game consoles. · To improve its home publishing software, Microsoft may obtain rights from a third party to include a collection of "clip art" in the next version of Microsoft's publishing product. The agreement "restricts" the third party from offering the same clip art collection for use in a competing publishing product for a period of time. · Microsoft and an ISV jointly develop new technology. The joint venture agreement "restricts" the ISV for a period of time from developing competing technology. 355. Section 8 could be read to ban Microsoft from competing in any product category. I know such a ban would not be reasonable, and yet that is what the language of Section 8 appears to provide for. 356. It states that Microsoft may not take (or threaten) any action that directly or indirectly adversely affects anyone based directly or indirectly, in whole or in part, on any actual or contemplated use, distribution, promotion, support, development, etc. of any non-Microsoft product, service, feature or technology (not limited to middleware). Under this broad provision, nearly any act of competition could be seen as an adverse act. Competing means attempting to maximize sales, which often entails taking sales from a rival (adversely affecting them). At the very least, Microsoft would have no comfort that routine business acts would not violate Section 8. 399. Section 12 would also require Microsoft to provide AOL (and the rest of the industry) with the source code for MSN Explorer 6.0 and its successors. MSN Explorer 6.0 is innovative software that makes it easy and enjoyable to use Microsoft's MSN family of Web sites (links are available via www.msn.com). [...] 401. Reducing Microsoft's incentive to innovate would reduce competition in Web browsing software. Why would AOL continue development of its own Web browsing software if Microsoft's technology were available free of charge, with rights to all improvements (assuming Microsoft made any) for the next ten years? 428. The availability of a reasonably good, low-priced version of Office running on non-Microsoft operating systems would severely hurt Microsoft's operating system business by putting it at a very big price disadvantage. For all the R&D that Microsoft puts into its operating system technology, the economics of the business are such that we generate revenue of only about $70 per Windows unit. We generate revenue of roughly $150 to $275 for each user of Office. (As is customary in the software industry, royalty rates for Office vary considerably by version, volume licensed, and channel of distribution.) That means that a computer user that wanted to run a version of Office would have to consider if he or she was willing to pay an additional $150 to $275—as much as three times the price of Windows itself—in order to do so on Microsoft's version of Windows. Microsoft could not simply reduce the price of Office to match or beat the price of the non-Microsoft Office version because we would generate insufficient revenue to support new R&D on the product. 433. In addition to requiring Microsoft to auction off its Office technology to three bidders, Section 14 would require Microsoft to continue to invest, for ten years, in developing new versions of Office for the Apple's Mac OS, with "features consistent with Microsoft Office for Windows." Section 14 would obligate Microsoft to invest its resources in this way without regard to the economic or technical viability of doing so. 434. For example, if the Apple Macintosh platform were to lose share in the future—a possibility that cannot be ruled out given Apple's "near death" experience in the mid-1990s—it would be economically inefficient for Microsoft to continue to invest in building applications for the platform. Other changes in business circumstances, such as a decision by Apple to focus on customer segments that generate little demand for business productivity software, might also render it economically unviable to continue to build new versions of Office for the Mac. A lot can happen over ten years. 150 450. Microsoft has a strong track record both in supporting industry standards in its software and in contributing to the development of industry standards. Microsoft's products provide state-of-the-art support for dozens of important standards, enabling developers to make use of them in their products with little effort. In the area of Internet standards alone, we provide excellent implementations of TCP/IP, HTTP, FTP, HTML, XML, SOAP, UDDI, WSDL, PPP, POP3, SMTP, PPTP, LDAP, TELNET and others. (See Appendix A.) Our implementation of these standards in Windows promotes interoperability between Windows and non-Microsoft software, both platforms and applications. 456. Third, Section 16 would require Microsoft to "fully" implement standards even before they have been finalized and adopted by a Standard-Setting body. Yet before finalization, standards are in flux, with various proponents of the standard debating the virtues of one approach or another. 457. Fourth, Section 16 would require that Microsoft "fully" implement a "Standard" when (i) it is merely under consideration by a Standard-Setting Body, (ii) once it is adopted, and (iii) as "modified from time to time." Nothing in Section 16 grants Microsoft time to develop new implementations to meet changing specifications for a standard and nothing states which products must comply with the standard. 458. Fifth, Section 16 fails to distinguish between bona fide standardsetting bodies, such as the Internet Engineering Task Force or the World Wide Web Consortium, and ad hoc groups associated with particular companies or industry alliances, such as the Java Community Process (which Section 22.kk explicitly includes in the definition of "Standard-Setting Body"). The Java Community Process is a group organized by Sun to obtain feedback on Sun's proprietary Java technology and promote that technology. Sun retains veto control. It is not a true industry Standard-Setting Body. ------------------------------------------------------------------------- POLITECH -- Declan McCullagh's politics and technology mailing list You may redistribute this message freely if you include this notice. To subscribe to Politech: http://www.politechbot.com/info/subscribe.html This message is archived at http://www.politechbot.com/ Declan McCullagh's photographs are at http://www.mccullagh.org/ ------------------------------------------------------------------------- Sign this pro-therapeutic cloning petition: http://www.franklinsociety.org -------------------------------------------------------------------------
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