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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

STATE OF NEW YORK ex. rel. Attorney General ELIOT SPITZER, et al.,

Plaintiffs, Civil Action No. 98-1233 (CKK) v.

MICROSOFT CORPORATION,

Defendant.

EXECUTIVE SUMMARY OF DIRECT TESTIMONY OF BILL GATES

Bill Gates is the Chairman of the Board and Chief Software Architect of

Microsoft. He co-founded Microsoft in 1975 together with his friend Paul Allen. Mr. Gates was

Microsoft's Chief Executive Officer from 1986, when the company went public, until January

2000. Mr. Gates relinquished his duties as CEO in January 2000 so that he could spend more

time working with the product groups at Microsoft to develop new technologies that will be

necessary to enable the next generation of computing.

Mr. Gates is submitting testimony in this action to provide the Court with

information concerning Microsoft's development of platform technology and how OEMs, ISVs

and others use that technology in building new products. Mr. Gates also describes his belief that

Microsoft has made a significant contribution to the success of the PC industry through its

development and broad licensing of the Windows family of desktop operating systems, as well

as other popular software products.

In his testimony, Mr. Gates identifies the key elements of Microsoft's business

model that have been essential to the success of Windows and, more importantly, to the value

Windows has provided to the marketplace. He then explains why the non-settling States'

proposed remedy would deprive the marketplace of the primary benefits provided by Windows,

resulting in great harm to the PC ecosystem and to consumers.

In fact, Mr. Gates explains why Microsoft would be unable to develop a version

of Windows that would comply with Section 1 of the non-settling States' proposed remedy.

Section 1 thus would ban Microsoft from continuing to license its Windows desktop operating

systems six months after entry of the non-settling States' proposed remedy, unless the Court later

agreed to modify the provision.

Mr. Gates's testimony is divided into three sections. In Section I, Mr. Gates

describes Microsoft's formation and its early development of operating system products. As

Mr. Gates explains, for more than 25 years, Microsoft has been at the forefront of the develop-

ment of the PC industry. In particular, Microsoft's creation and nurturing of a common software

platform that ran across multiple brands of PCs--namely, Microsoft's MS-DOS and later

Windows operating systems--helped to unify a fragmented industry. Microsoft's platform

software provided consumers with the benefits of broad interoperability across (i) PCs from

many different OEMs and (ii) applications from many different ISVs. It is no exaggeration to

say that Microsoft helped to bring about a revolution in computing.

Mr. Gates also briefly describes in Section I of his testimony Microsoft's current

efforts via its .NET and Trustworthy Computing initiatives to develop breakthrough technologies

that, if successful, could spark a new round of investment and excitement in computing. For

example, Microsoft today is investing heavily in XML Web Services, a next-generation

computing platform that holds the potential to unleash new waives of productivity gains in the

economy.

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In Section II of his testimony, Mr. Gates addresses three overarching elements of

Microsoft's business model that have contributed significantly to Microsoft's success and to the

success of every other company that builds products that take advantage of the Windows plat-

form. Those three elements are: (i) the stability, consistency and quality of Windows and

Microsoft's commitment to developing new releases of the operating system that provide ISVs

and consumers with new innovative features and functionality; (ii) the interoperability across a

wide range of hardware and software that Windows provides; and (iii) the central role played by

intellectual property protection in providing Microsoft with an incentive to invest capital, time

and energy in developing new software. The non-settling States' proposed remedy would under-

mine all three of these elements, causing great damage to Microsoft, other companies that build

on Microsoft's platforms, and consumers of PC software.

In Section III of his testimony, Mr. Gates analyzes each of the substantive provi-

sions of the non-settling States' proposed remedy on a section-by-section basis. Mr. Gates

explains why the non-settling States' proposed remedy would result in the fragmentation of the

Windows platform. This fragmentationwould harm not just Microsoft, but also the many other

companies that have built products and businesses based on the stable and evolving Windows

platform, as well as all Windows users. The only companies that would arguably benefit from

the fragmentation of the Windows platform are Microsoft's competitors.

Mr. Gates then explains why the non-settling States' proposed remedy would

deprive Microsoft of much of the economic value of its two most important products, Windows

and Office. In fact, if entered by the Court, the non-settling States' proposed remedy would

result in a massive transfer of Microsoft's present and future intellectual property rights in

Windows and Office to Microsoft's competitors. With free access to Microsoft's technology,

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competitors could build a clone of Windows (a product that mimics the key features of the

operating system) and their own version of Office without bearing any significant part of the

R&D expenses that Microsoft incurred to build the technology. Indeed, providing Microsoft's

technology to its competitors to enable them to build "functional equivalents" of Microsoft's

products appears to be a central objectives of the non-settling States' proposed remedy.

Mr. Gates testifies that the non-settling States' proposed remedy would greatly

reduce Microsoft's incentive and ability to develop and deliver new technologies to the market-

place. The non-settling States' proposed remedy thus would have three consequences.

First, companies that build on or otherwise benefit from Microsoft's heavy

investment in developing new technologies--OEMs, ISVs and the businesses and individual

consumers who use Microsoft's software--would be harmed. With the loss of the positive

feedback benefits provided by Windows, the marketplace would experience higher prices and

less innovation.

Second, the non-settling States' proposed remedy would prevent Microsoft from

delivering breakthrough technologies, such as its current .NET initiative, that will be necessary

to enable the next-generation of computing. This would have a significant adverse impact on

companies that are building businesses on .NET and on consumers who would be denied the

benefits of the new and exciting innovations .NET promises to deliver. Microsoft's market

capitalization is based on the market's well-founded belief that Microsoft is on a path to deliver a

wide range of those breakthrough technologies, which will generate new sources of revenue.

Microsoft thus would be greatly devalued as a company if the non-settling States' proposed

remedy were entered.

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Third, competition would be reduced not only in operating systems, but also in

other key product categories where Microsoft is the strongest challenger to incumbent leaders.

These categories include online services (where AOL Time Warner leads), handheld devices

(where Palm leads) and game consoles (where Sony leads). Indeed, in the important area of

server computing--both hardware and software--the strongest competitive challenge to incum-

bent, high-priced UNIX vendors such as Sun Microsystems is the PC model. Under this model,

multiple OEMs building on a standard, widely licensed and attractively priced operating system,

such as Windows 2000 Server, compete, resulting in lower prices for consumers.

Finally, Mr. Gates explains in Section III of his testimony why it would be

extremely difficult, if not impossible in some cases, for Microsoft to comply with the non-

settling States' proposed remedy as written. Many provisions of the non-settling States'

proposed remedy, particularly its definitions relating to "middleware," are vague and ambiguous.

As such, they do not provide Microsoft with a clear statement of its obligations. Other provi-

sions of the non-settling States' proposed remedy are simply not feasible to implement.

Although many provisions would lead to extreme results, Microsoft would not have the freedom

to construe the non-settling States' proposed remedy in ways that it finds less extreme.

As Mr. Gates explains, Microsoft is committed to complying fully with Court

orders, including any remedy that may be ordered in this case. Microsoft can do so, however,

only if the remedy is clear as written and it is technically feasible to comply with its terms. Any

remedy imposed also should preserve the economic and consumer benefits that Windows

provides and maintain Microsoft's incentive to bring new innovations to the marketplace.

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