A Window on Microsoft

Brad Smith took over as Microsoft Corp.’s general counsel early this year, after the software giant negotiated a proposed settlement of antitrust claims by the U.S. Justice Department and nine states. Within weeks, a federal judge in Washington is expected to rule on a request by nine other states that Microsoft be punished more severely for the abuses of monopoly power identified by an appeals court.

Question: A lot of people were surprised that when the nine non-settling states were asked to prioritize their picks for remedies at the last minute, they picked technical disclosure as opposed to something more onerous, such as a modular Windows. Were you surprised?

Answer: I don’t know if I had any particular expectation. One possible irony is that technical disclosure is actually something that we’ve been trying to do more of at the company, and it was a predominant theme in the settlement that was negotiated last fall. We recognize that there may arise opportunities for additional technical disclosures. Our concern about what the states are seeking is that they don’t have much of anything that could rightly be labeled technical disclosure. What they have been seeking is the confiscation or the compulsory licensing of our intellectual property rights--the notion, for example, that some of our most valuable intellectual property would be put in the public domain or auctioned off to our competitors.

*

Q: A number of people think a question from the judge indicates she wants to give the states something, possibly something relatively small. How much is too much? What would trigger an appeal?

A: There are two or three principles that are fundamental to us. One is protecting the integrity of the Windows product. If others in the distribution channel can remove code from Windows, that poses a problem that is fundamental to us. It would mean that the reliability and security of Windows would be undermined. Consumers could not have confidence that the product that they get is the product that they want. It would make it extraordinarily difficulty for us to continue innovating by developing new features in Windows.

The second fundamental concern is the variety of steps that would confiscate in one way or another our intellectual property rights. A good example of that is the proposal that would take each advance that we make in Internet Explorer and give that away for free to our competitors. It’s basically simple economics that says it doesn’t make sense to spend hundreds of millions of dollars to develop software if you have to give away the results.

The states have asked for sanctions that go so far beyond the sanctions that the other states and the federal government negotiated that you would have a very real risk of conflicting judgments. The practical problems that could raise are obviously enormous. A second problem is that the devil’s in the details. One of the points that Bill Gates made quite clearly when he testified is that you can have language on its face that may seem appropriate to someone, but when you really think what it would mean for software development, you realize that the results are draconian and would have all of these unintended consequences. So the truth of the matter is that we would need to study very carefully whatever result comes from the court. And unfortunately, unless you have the opportunity to sit down and negotiate something and really work out all of those details, the risk of serious unintended consequences is quite high.

*

Q: Objectors to the proposed settlement have complained about loopholes and wiggle room, and that has resonated because of the history of the previous consent decree and the fact that Microsoft knows how to find weaknesses in contracts. There’s a new CEO here, and there’s a new general counsel. However this comes out, do you think there won’t be quite as much of a hardball stance?

A: We have all learned a great deal from the experience of the past five years. We recognize that we need to pursue business models and technology initiatives that create opportunities for success among a wide variety of companies. It’s hard to believe that we are going to be very successful in the future if we are the only ones who benefit from the new technologies that we bring to market. One reason that we had controversies with the government is that we had disagreements with others in the industry.

Second, I would say that we appreciate that people will listen to what we say, but they will judge us by what we do. One concern that some people have raised is that we won’t disclose as much as they think we should under the requirements in the proposed consent decree. The suggestion is that we will rely on the exceptions created for security and digital rights management, for example. I expect that in the next month we will have the opportunity to tell the industry what it is that we are doing, and I hope that then they will perhaps become a little bit more comfortable. But this isn’t something that you can do and suddenly have everyone walk away applauding in six or 12 months. This is a multiyear, sustained commitment that we will need to deliver on.

*

Q: Microsoft’s legal situation reminds me a little bit of “The Sorcerer’s Apprentice,” where you cut up one big broom and then there’s 10 little brooms. You’ve got the European Union, you’ve got more than one class-action suit, you’ve got AOL Time Warner, Sun Microsystems and Be Inc. How do you rank the threats? And second, I’m reminded of the tobacco industry’s plight--there were so many different legal strategies against it, in so many different forums, by so many different people, that almost regardless of the merits, there was a real and eventually realized fear that they were going to lose sooner or later. How do you deal with that kind of a siege by so many forces?

A: I tend to put things in two distinct categories, governmental inquiries and lawsuits on the one hand and private cases on the other. Governments are elected to represent the public interest, and they are given broad powers to do so. Competitors represent only themselves, and to some degree the law recognizes that. And it’s more often the case that competitor cases or class-action cases are about money, as they seek to recover damages. While money is important, it’s not about the future in the same way that governmental cases are, where they are seeking to devise a regulatory approach to technology.

The most important part about the governmental area is just how vexing it is when multiple governments around the country and around the world seek to regulate a single global technology like the Internet or software that runs on the Internet. A car company can make a catalytic converter for sale in California that is different than it is in Germany. But a software company cannot create software that is different in California and Germany unless we want to erect big new national or state borders on the Internet. One of the big challenges that we’re all going to have to think about over the next 10 to 20 years is how multiple governments can best work together when they are trying to regulate a technology that is singular and global in character.

*

Q: Will Microsoft be hurt in any way by the shifting public sentiment seemingly against all big companies?

A: We all need to recognize that there is something of a crisis of confidence in the corporate sector. We all need to work twice as hard to sustain the confidence that we do have and to regain the confidence that the business sector has lost. This is something we need to think about to some degree in everything we do, whether it’s financial accounting practices or corporate governance issues or any other aspect of business life.