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Prepared Text of Remarks by Craig Mundie, Microsoft Senior Vice 
President
The Commercial Software Model
The New York University Stern School of Business
May 3, 2001

It has long been said that change is the only constant in the
technology industry. In the past 20 years the velocity of that change
has accelerated at a seemingly exponential rate, serving constantly
as an engine of growth for the global economy.

Yet during the last year, the U.S. economy has hit what could be
regarded as its most substantial speed bump of the past two decades.
Illustrated most starkly by the declining valuation of the NASDAQ,
we've witnessed a notable decline in consumer confidence that has
people wondering whether we're at a brief respite or whether we've
reached the end of an economic era.

At Microsoft we believe that the personal information technology
revolution that began in the early 1980s is far from over. It
probably has at least two more decades to go. But it's also important
that we learn from the lessons of the past year and apply them in
order to make the most of the potential that lies ahead.
One lesson is that we should keep things in context. Every big phase
of economic expansion has its share of downturns, and new
technological advances frequently bring with them a share of
over-exuberance. The recent and substantial technology investment
downturn mirrors similar episodes that affected railroads, steel,
automobiles and radio. In this context, it's not surprising that, as
early as 1995, Bill Gates wrote in his book The Road Ahead about what
he called the "Internet gold rush" and predicted both enormous
long-term advances and substantial short-term setbacks, saying "Gold
rushes tend to encourage impetuous investments. A few will pay off,
but when the frenzy is behind us, we will look back incredulously at
the wreckage of failed ventures and wonder, Who funded these
companies? What was going on in their minds? Was that just mania at
work?"

But there is a broader lesson as well companies and investors need
to focus on business models that can be sustainable over the long
term in the real world economy. A common trait of many of the
companies that failed is that they gave away for free or at a loss
the very thing they produced that was of greatest value in the hope
that somehow they'd make money selling something else. The Internet,
for example, was full of sites producing content for free, in the
hope that somehow they'd generate revenue from sources that never
materialized, whether it was advertising, subscriptions, or a wing
and a prayer. As we’ve learned or really re-learned one can't
build a business or our economic future on that type of flimsy
foundation.

Contrast this recent experience with the two decades of economic
success that preceded it. The global economy grew in an unprecedented
way in no small measure because of a generation of new companies, of
which Microsoft was fortunate to be one. Many or even most of these
companies invested heavily in research and development and sold their
principal products at prices that covered their costs and generated
profits that they reinvested in further research and development.
This research and development model, in turn, was almost always based
on the importance of intellectual property rights. Whether
copyrights, patents or trade secrets, it was this foundation in law
that made it possible for companies to raise capital, take risks,
focus on the long term, and create sustainable business models.
Despite the demonstrable success of the computing industry and the
IP-based economy, and the clear failure of newer firms that gave away
products for free, it's notable that in the past year there has been
a broader discussion about whether the ingredients that delivered
longstanding economic success can continue to do so. In part this
discussion has focused on whether the personal computer will continue
to provide a sustainable technological foundation for economic
growth. And in part this has focused on whether IP protection as we
have known it whether for music, software, or other products
should continue to be a fundamental engine of economic growth.
The questions to be raised are twofold:
Can the personal information technology continue to drive broad
economic growth?
The answer is "yes."
The computing industry needs to move to a model of multiple computing
devices that more effectively empower people to unleash the computing
power of the Internet and move their ideas and their content with
them from machine to machine.

Should an information-based economy protect the intellectual property
assets that are driving its growth?
The answer is "yes."
We should examine the progress of the Internet to understand the
landscape of the software industry today and how intellectual
property fits into that landscape.

In thinking about the technology foundation we need, it's important
to recognize that the popular use of the Internet is still less than
10 years old, and is already moving into its third significant phase.
Phase 1: In the early '90s it was all about static information. The
nascent World Wide Web was catapulted to the world stage as millions
of individuals and businesses began to tap the potential of the
medium.

Phase 2: The late '90s saw the birth of the online transaction and
the promise of Internet-based business models. Both were about
connectivity, but now the static distribution of information was
replaced by business-to-customer or business-to-business transactions.
For the general public, Amazon.com came to personify the Internet
transaction. Revenue models based on advertising sales vs. product sales
came into vogue and Yahoo became the poster child for this model. The
interesting part of this model is the shift of focus away from the
technology IP to content IP as the revenue engine for a company.

Phase 3 is what is being worked on now. It's all about connecting the
currently separate complex systems of information and transactions
and bringing that power to the individual in a readily accessible
format on a variety of devices.

These new technologies will be able to identify the relationships
between disparate information sources and transactional environments.
The individual may then cull relevant data and execute the necessary
transactions to complete a task or make strategic decisions. An
example of this would be to have a single process for identifying
physicians covered by your healthcare plan, comparing physical
locations of clinics to mass transit schedules and routes, scheduling
the appointment and taking care of the co-pay all at once. Most
importantly, this can be done any time, any place and on any device.
There are challenges to the success of Phase 3 becoming a reality.

Business models:
The increasing numbers of failures in the .com space show a flaw in
many of the existing Internet business models.

Advertising as the primary revenue stream
Operating under the assumption that market share equals revenue
Free now, pay later

Development models:
A heavy investment in research and development is going to be
required in order for businesses and individuals to see the benefits
of phase 3.

People:
The technology industry has to prove its commitment to privacy and
security in order to encourage user acceptance of the technologies.
Furthermore, the next phase needs to be presented in a simple and
compelling fashion so that individuals and businesses may make use of
them easily.

The paradigm shift that is at the core of phase three is the focus of
the Microsoft .NET strategy. .NET is a set of Web services that are
user-centric rather than device-centric. This is a shift in focus
from individual Web sites or devices to new constellations of
computers, devices, and services that work together to deliver
broader, richer solutions. People will have control over how, when
and what information is delivered to them. Computers, devices and
services will be able to collaborate directly with each other, and
businesses will be able to offer their products and services in a way
that lets customers embed them in their usage of the Web at their
discretion.

It is important to note that Phase 3 will not come about due to any
one company's, or even a single group of companies, efforts.
Innovation investment and a significant community of software
developers will need to share the excitement for bringing about the
next generation of the Web. The resulting intellectual property will
be the foundation of the business model providing the continuing
opportunity for R&D investment.

The business model I am speaking of for Phase 3 is the Commercial
Software Model. The taxonomy of this model is built around 5 key
elements:

Community: a strong support community of developers
Standards: promote collaboration and interoperability while
supporting innovation and healthy competition

Business Model: promotes the growth of a profitable business
Investment: level of research and development investment drives
resources for future innovation

Licensing Model: provides product and source access without
jeopardizing the intellectual property rights of those who create or
use the software

Microsoft has fostered the world's largest community of software
developers for well over a decade. Today, our developer network
(MSDN) works with a community of 5 million developers. The element of
the commercial software model for Phase 3 that we need to improve is
that of our licensing model. Microsoft is expanding its licensing
model to include our "Shared Source Philosophy."

Shared Source is a balanced approach that allows us to share source
code with customers and partners while maintaining the intellectual
property needed to support a strong software business. Shared Source
represents a framework of business value, technical innovation and
licensing terms. It covers a spectrum of accessibility that is
manifest in the variety of source licensing programs offered by
Microsoft.

The principles of the Shared Source Philosophy are:
Helping customers and partners to be successful through source access
programs

Building the development community and offering them the tools to
produce great software

Improving the feedback process in order to create better products for
Microsoft's customers and partners

Maintaining the integrity of our customers' environments
Increasing educational access in order to get the technology into the
hands of universities worldwide, and to seed the future of a strong
technology industry

Protecting software intellectual property based on the firm belief
that software offers value as the basis of a successful business.
Some examples of Shared Source already being implemented at Microsoft:
Research Source Licensing: For nearly a decade Microsoft Research has
licensed Windows source code to more than 100 academic institutions
in 23 countries.

Enterprise Source Licensing Program: Source code for Windows 2000
and subsequent releases of Windows is available for licensing at no
charge to over 1,000 enterprise customers in the United States.
Today we are announcing a pilot program expanding the ESLP to 12
additional countries.

ISV Source Licensing: we are developing a program for licensing
Windows source code to top tier ISVs for development and support
purposes

OEM Source Licensing: Windows source code has been licensed for years
to leading OEMs to assist in the development and support of their
consumer and server products

Windows CE source code access: We are licensing Windows CE source
code through Platform Builder 3.0 (generally available to all
developers). Microsoft will be broadening and adding to the
community support mechanisms through the Platform Builder Program.
In the second half of this year we will offer academic site licenses
for CE source code.

Additionally, we have announced an expanded level of CE source access
to, (i) our leading silicon vendor partners via the Windows Embedded
Strategic Silicon Alliance program, and (ii) our leading system
integrator partners via the Innovation Alliance Program.
Sample code: Over the years Microsoft has made millions of lines of
source code freely available to developers through resources such as
SDKs, DDKs, and MSDN.

We have announced that the specifications for the .NET Framework have
been submitted to the ECMA standards body, enabling others to
implement and evolve this technology in a platform-independent manner
so that it is can be rapidly and widely adopted on an industry-wide
basis.

We emphatically remain committed to a model that protects the
intellectual property rights in software and ensures the continued
vitality of an independent software sector that generates revenue and
will sustain ongoing research and development.

The commercial software model is just one model being utilized in the
software industry today. It is important to take into account the
Open Source Software movement as an example of an alternative model.
The phrase "open source software," or OSS, is often used as an
umbrella term for a collection of product development, distribution
and licensing practices, many of which have existed individually
since the early days of computing. There are actually a number of
different approaches within this community, but the common traits are
providing people with access to source code and allowing others to
modify and redistribute that code.

As a result of Microsoft's statement of position today, many people
will attempt to say that Shared Source is Microsoft's failed attempt
at being an Open Source Company. This could not be a more incorrect
statement. Shared Source is not Open Source. We recognize that OSS
has some benefits, such as the fostering of community, improved
feedback and augmented debugging. We are always looking for ways to
improve our products and make our customers more successful, and to
that end we have incorporated these positive OSS elements in Shared
Source. But there are significant drawbacks to OSS as well.

The OSS development model leads to a strong possibility of unhealthy
"forking" of a code base, resulting in the development of multiple
incompatible versions of programs, weakened interoperability, product
instability, and hindering businesses’ ability to strategically plan
for the future. Furthermore, it has inherent security risks and can
force intellectual property into the public domain.

Some of the most successful OSS technology is licensed under the GNU
General Public License or GPL. The GPL mandates that any software
that incorporates source code already licensed under the GPL will
itself become subject to the GPL. When the resulting software product
is distributed, its creator must make the entire source code base
freely available to everyone, at no additional charge. This viral
aspect of the GPL poses a threat to the intellectual property of any
organization making use of it. It also fundamentally undermines the
independent commercial software sector because it effectively makes
it impossible to distribute software on a basis where recipients pay
for the product rather than just the cost of distribution.
In this sense, open source software based on the GPL mirrors the .com
business models that proved the least successful during the past
year. They ask software developers to give away for free the very
thing they create that is of greatest value in the hope that somehow
they'll make money selling something else. In effect, it puts at risk
the continued vitality of the independent software sector. The
business model for OSS may well be attractive for software as an
adjunct to hardware the model of the '60s and '70s or for service
businesses that do not generate the revenue needed for major
investments in technology. But as history has shown, while this type
of model may have a place, it isn’t successful in building a mass
market and making powerful, easy-to-use software broadly accessible
to consumers.

In contrast, two decades of experience have shown that an economic
model that protects intellectual property and a business model that
recoups research and development costs have shown repeatedly that
they can create impressive economic benefits and distribute them very
broadly.

Finally, the fact that we believe strongly in the value of IP
protection doesn't mean that we discount the importance of
contributing to and supporting the public domain of knowledge as
well. We believe that interaction between the public domain and the
IP-based sector needs to be based on mutual responsibility and
respect.

There is an important and longstanding tradition for the public
domain of knowledge, or "intellectual commons." This is reflected in
many ways, including federal support for basic research, the
limitations on IP rights reflected in the law and, more recently, the
broad practice of contributing technology to public standards groups
for the continued development of the Internet. We support this and
want to continue to be a constructive and responsible participant in
this community, including making contributions to public standards.
There is an equally important tradition of commercial companies
having the opportunity to benefit from and apply this public
knowledge, including by developing commercial products that are
protected by IP rights. There are many examples of this, including
the many products that grew from research in the space program and
the advances in speech recognition technology that followed work done
at pre-eminent institutions such as Carnegie Mellon.

The GPL asserts that any product derived from source code licensed
under it becomes subject to the GPL itself. When the resulting
software product is distributed, the creator must make all of the
source code available, at no additional charge. This effectively
makes it impossible for commercial software companies to include
source code that is licensed under the GPL into their products, since
by doing so, they are constrained to give away the fruits of their
labor. As we think about technology, IP rights, and the public sector
of knowledge, we need an intellectual model that encourages
interaction, not a model that drives them apart. We believe that a
shared source model, coupled with continuing contributions to public
standards, provides a path that is preferable to the open source
approach founded on the GPL.

Collectively we need to seize the opportunity to make the most of the
next two decades of potential economic growth. This requires the
proper combination of continuity and change. It means keeping the
model of personal information technology but adapting it to the needs
of the next generation of technology, as we are doing with .NET. It
means promoting a sharing of knowledge, through source code and
broader interaction, while respecting the importance of intellectual
property rights. If we combine these approaches in the right doses,
there is cause for great optimism about the economic road ahead.

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