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Microsoft: The EU appeal still matters

Microsoft General Counsel Brad Smith speaks with News.com about why he thinks a settlement might still be possible.

On Wednesday, Europe's Court of First Instance dealt Microsoft a severe blow--ordering the company to immediately begin offering a version of Windows without a bundled media player and to start sharing key communications protocols with server rivals.

Those sanctions had been put in place back in March, as part of a European Commission antitrust ruling that included a record fine. Microsoft, which is appealing that ruling, had requested an emergency stay of the penalties while its appeal is ongoing. The court granted the emergency stay while it considered the issues. But on Wednesday, Bo Vesterdorf, president of the European Court of First Instance, said Microsoft must comply with the penalties imposed by the Commission in March, even as the company's appeal makes its way through the system.

After a long night of digesting Wednesday's ruling, Microsoft General Counsel Brad Smith spoke to CNET News.com about why the Microsoft appeal still matters, about how the European Union order differs from past antitrust rulings and about why he thinks a settlement might still be possible.

Q: In Microsoft's court papers, it argued that a stay of the European Commission's order was needed because, essentially, if the court allowed competitors access to Microsoft information, there was no way to unring that bell. Since you have been denied that stay, doesn't this, in effect, render Microsoft's broader appeal moot?

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A: I don't think it renders the continued litigation moot for a number of reasons. First, this case is going to set a very important precedent for the entire information technology industry.

When we get to a final decision on the merits, that decision will have a broad impact on the state of intellectual-property protection in Europe. It will have a broad impact on whether companies can develop innovative technologies with a sense of confidence that they will be able to deploy those technologies in their own products without an obligation to allow their competitors to use them at the same time.

In all of those respects, this case continues to be as important as it always has been. There are aspects that cause us concern--namely that once technology is licensed to other companies and information is provided, one cannot expect people to forget everything that is learned from that process. We're now simply going to have to live with those concerns and move forward and comply with the order.

When Microsoft talks about its conduct post-settlement with the U.S. Department of Justice, it talks about a framework, a set of guiding practices about how the company should operate. Does the fact (that) this order is going into effect--does that change that framework? Are there new guidelines that the company will have to operate under, based on the precedents of this ruling?
We'll take a close look at this decision and read it and think about it carefully. To some degree, it is perhaps premature to draw too many conclusions when we have had so little time.

This is the first time we are being required to offer to consumers a version of Windows that provides them with less value rather than more.

I would say that the framework that emerged in the United States resulted from the final outcome, namely a settlement agreement that was then approved in court.

That's one of the benefits of a settlement. It creates certainty. One knows what we need to do. In contrast, we really won't get that certainty in Europe until we get a decision on the merits of the case.

I know that you have talked about the possibility of renewed settlement talks, but with the ruling basically making the order go into effect immediately, what incentive does the European Commission have to come to the table?
I think there remain a number of potential incentives for a more amicable resolution. Whether those will be persuasive to people obviously is not for me to say and remains to be seen.

First, a settlement creates a final outcome, and it does so sooner rather than later. Instead of having to go through months and years of litigation, one can put in place a regulatory framework that will start to apply immediately, with confidence that it will continue to apply in the future.

Second, as I mentioned, there are a number of parts of today's decision that I think recognize the significant arguments on the merits that we'll have the opportunity to make as the case goes forward. A settlement would address that aspect of the equation for all concerned.

Third, and perhaps most significantly, I continue to believe that one could sit down and devise a solution that would create more benefits for consumers and more opportunities for others in our industry than the decision that was entered by the European Commission in March.

This case is going to set a very important precedent for the entire information technology industry.

Is this the first time that a court or a regulatory body has changed the way you distribute Windows?
Not really. Certainly, the settlement that we entered into in the United States impacted a number of aspects of the way we distribute Windows. It governs the terms of our contracts with PC manufacturers. It even governs some of the design features in Windows. The aspect that is distinctive about the European Commission's decision is really twofold.

This is the first time we are being required to offer to consumers a version of Windows that provides them with less value rather than more.

This is also the first time that a regulatory agency has entered to affect an outcome that conflicts so substantially with the regulatory outcome of another country. We now have a clear regulatory conflict between Europe and the United States.

Much of the attention has been on the requirement to sell the version of Windows without a bundled media player. As to the sharing of technical information, How distinct are the requirements of what the EU has ordered versus the protocol licensing that Microsoft currently does under the U.S. settlement?
There are some significant differences. One, in particular, is that the European remedy obligates Microsoft to license communications protocols so that our competitors can make use of them in their own, directly competing, products.

Special coverage
Ruling requires software
giant to unbundle Media
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In other words, they obtain the right to use certain of our server software components to put in their directly competing server software product.

In the United States, by contrast, we were obligated to license client communications protocols so that others could use them in their server software. They didn't, however, get the right to put them in their directly competing client software.

Naturally, you take a step that much more fundamentally undermines a company's incentive to innovate when you give a competitor the right to make use of technology in its own directly competing products. That is a big change.

Ultimately, I think that that factor may be one that enables us to win this case on the merits, but for now, we will need to comply with this obligation.