Testimony of Bill Gates to the Committee on the Judiciary United States Senate (March 3, 1998)
web posted April 1998
Good morning Mr. Chairman and members of the Committee. My name is Bill Gates and I am the Chairman and CEO of Microsoft Corporation. I thank the Committee for its invitation to participate in the hearing this morning and welcome this opportunity to provide the Committee with Microsoft's views on the healthy state of competition in the computer software industry.
I believe that the continued unfettered growth of this industry is critical to both our economy at home and our competitiveness abroad. We appreciate the important role that this Committee and the Congress have in considering the public policy issues that will ensure that the United States continues to serve as the global leader in computer hardware and software technologies.
Mr. Chairman, I commend you and the other members of your Committee for your efforts in such areas as protecting intellectual property rights, combating software piracy both here and abroad, and establishing immigration policies that give our industry and other high-tech companies access to the best and the brightest resources. I will be happy to answer any questions you may have about the important subject of today's hearing.
Microsoft's Contributions to the Industry
Mr. Chairman, let me start by describing Microsoft and our perspective on our contribution to the computer industry and the U.S. economy generally and our position in the global marketplace.
From the very beginning of Microsoft 23 years ago, our goal has been to create software that improves the quality of people's lives. Along the way we have listened to our customers, taken account of their views, and worked very hard to provide them with new and useful technologies they want and need. Most significantly, we have provided such new and improved products at the same or often lower prices than products previously available. I know of no other industry in which consumers have benefited from greater price/performance gains over the past two decades than in the personal computer industry.
Today, the personal computer has become a powerful and easy-to-use fixture in most offices and is becoming more common in our schools and in our homes. Prices for personal computers continue to fall, even as PCs become more powerful and offer greater features than ever before. As recently as 1990, for example, a typical personal computer with an Intel 386 chip, 2Mb of RAM and a 60 Mb hard drive cost about $3,000. Today, for half the price you can buy a multimedia personal computer with an Intel Pentium chip that is 8 times faster, has 16 times more RAM, 65 times more storage capacity, a CD-ROM drive and, of course, a vastly improved operating system. Just two weeks ago, The Washington Post touted an upsurge in sales of $1,000 PCs and predicted that prices would fall even lower. (A Hewlett-Packard representative was quoted as predicting $599 PCs by Christmas.) As prices continue to spiral downward while performance improves at an accelerating rate, soon every business, school and household will be able to take advantage of the enormous benefits from what was once thought of as a luxury or as an expensive toy. Personal computers will become as commonplace in American households as a television or a telephone.
The increasing popularity of personal computers is in part attributable to their use as information appliances. One manifestation of this phenomenon is the explosive growth of the Internet, which permits unlimited access to truly amazing amounts of information on any subject from sources around the world. The Internet holds more promise than anything else that has happened in the computer industry in recent memory. Increased access to the Internet through low cost PCs and other devices will provide millions of workers with the tools to do their jobs better, empower students to become lifelong learners, and enable consumers to enjoy exciting new forms of information, communication, commerce and entertainment. In fact, the Internet promises to promote openness and competition more than any other invention of the last 100 years.
Microsoft has not watched from the sidelines as these exciting changes have swept the computer industry. Instead, Microsoft has been an active participant in providing the incredible price/performance gains that distinguish the computer industry. First, Microsoft has contributed a user-friendly PC operating system that we are constantly improving and that we make available to consumers at a small fraction of the cost of competing operating systems such as UNIX. By listening to our customers, we developed and continue to work tirelessly to improve Windows, making it possible for even a computer novice to enjoy the many benefits provided by the PC. (This year alone we will spend $1 billion on R&D related solely to improving future versions of Windows.) Moreover, through our licensing agreements with PC manufacturers, Windows comes preinstalled on PCs for less than 3% of the overall cost of the average machine, truly a good deal for consumers.
Just as significant, however, is Microsoft's development and widespread licensing of Windows as a common and open platform that tens of thousands of software developers, hardware vendors and solution providers use to innovate freely with their own products. At Microsoft we chose a different approach from traditional computer vendors, such as IBM and Digital, and even Apple Computer and Sun Microsystems today, who develop and market integrated computer systems - microprocessor, hardware and software all included from one vendor. Their business model certainly provides real benefits, most notably the ability to ensure that all components of a computer system are optimized to work together. But in Microsoft's view, these benefits are greatly outweighed by the inability of such integrated computer systems to work well - or at all - with computer systems from other vendors. The great thing about Windows is that it works with an extremely broad range of hardware and enables literally tens of thousands of different software products to work together. By promoting compatibility this way, Windows has fostered the development of a thriving and highly competitive PC hardware and software industry which affords consumers a wide range of choices at very competitive prices.
In short, Mr. Chairman, at Microsoft our business is writing great software that enables consumers to be more productive and efficient at work, at school and in our homes. We hire smart men and women and encourage them to be as creative as possible in making personal computing easier and more valuable. We stay in constant touch with our customers to make sure that our products are meeting their needs. We invest for the long term in new technologies that will enable people to do things with computers that are difficult to imagine today. We collaborate with and support thousands of companies in America and around the world that strive to deliver high-quality products to consumers at reasonable prices. We provide responsible leadership to guide the PC industry in innovating for the benefit of the consuming public. I am enormously proud of the success of our products and the thousands of dedicated Microsoft employees who have contributed to that success.
Competition in the Software Industry
Mr. Chairman, the computer software industry is one of the healthiest, most competitive and most innovative sectors of the U.S. economy. I believe that no segment of the U.S. economy is growing faster, creating more jobs - high paying, high technology jobs - or creating more opportunities for small businesses than the computer software industry. Between 1990 and 1996, the industry grew at a rate of 12.5 percent, nearly two-and-a-half times faster than the rate of the U.S. economy overall. Over 2 million employees are at work in the U.S. economy as a result of the software industry. By 2005, that number is projected to increase to well over 3.4 million jobs, representing nearly 3 percent of the entire U.S. workforce. More than 44,000 U.S. software companies earned over $100 billion in revenues in 1996. These, Mr. Chairman, are the vital signs of a healthy and thriving industry.
Innovation and ingenuity are the hallmarks of the computer software industry. No segment of the world economy is more dynamic than the computer software industry, which is based here in the U.S. and has strongly contributed to our reemergence as the world's technology leader. As Alan Greenspan recently remarked:
In the computer software industry, product life cycles are short - just twelve to eighteen months typically - as software publishers race to introduce new products at an ever faster pace. The rate of innovation continues to accelerate as microprocessors become more powerful and new software products are developed to take advantage of that increased power.
Microsoft and other vendors are offering innovative products in categories that did not even exist two or three years ago and every product on the market today will likely be obsolete in the same amount of time. The only question for Microsoft is whether we will be the ones to replace those products, or whether some other company will do a better job. All of us at Microsoft understand that if we don't continually innovate and create products that respond to our customers' ever increasing demands, we will quickly become irrelevant.
To keep up with the rapid pace of innovation and because our competitors are always investing heavily to develop technology to displace Windows, Microsoft has made an unprecedented commitment to research and development. Our investment in R&D has grown from about $350 million in 1992 to more than $2 billion last year, and expenditures are projected to be in the neighborhood of $2.6 billion this year. Microsoft far outpaces other companies in the computer industry in R&D spending relative to its size: Last year Microsoft devoted about 16% of revenues to R&D, while other leading companies, such as Intel, Oracle and Sun Microsystems devoted only about 8% of their revenues to R&D, and IBM devoted just 6%.
Mr. Chairman, in the computer software industry, rapid and unpredictable changes constantly create new market opportunities and threaten the position of existing competitors. The position of a product - no matter how popular - is never secure because it is impossible to know when the next new idea will come along that could render that entire product category less important or even obsolete. Few industries face this kind of intense competitive pressure, even those in other parts of the high technology sector. The computer industry is littered with examples of companies that enjoyed great success for a short time, only to be overtaken by new technologies that better served consumers' needs.
For instance, as inexpensive microprocessors became available in the 1970s, Wang, IBM and others developed computers dedicated to a single task: word processing. Demand for electronic typewriters soon declined sharply, and sales of dedicated devices from Wang and IBM rose sharply. (At one time Wang was nearly synonymous with word processing.) In the 1980s, however, demand for these single-task devices declined dramatically as personal computers became available that could perform a wide range of functions in addition to word processing. In the space of just a few years, Wang went from market leader to bankruptcy.
What occurred immediately after the transition from dedicated word processors to personal computers also illustrates the precarious hold that software products have on consumer preferences. As consumers began using personal computers to perform word processing, a software product called WordStar quickly emerged as the market leader. It did not stay in that position for long. By the mid-1980's, WordPerfect had displaced WordStar with a superior product that contained a variety of new features demanded by users. Today, Microsoft Word is the world's most popular word processing software because we have worked hard to make it the best product available. It too will fall by the wayside if Microsoft does not meet customer needs by continually adding new features and pricing the product competitively.
The advent of the PC industry itself is perhaps the best example of rapid and unpredictable technological change taking established market leaders by surprise. In the 1960s and 1970s, IBM and a few other large vendors such as Sperry Rand, Honeywell, Burroughs, Control Data and NCR were the titans of the computer industry. IBM in particular was thought by many - including many antitrust lawyers - to be invincible. (As you know, the Department of Justice filed a broad monopolization case against IBM in 1969, and pursued the case vigorously for thirteen years before ultimately dropping it.) Yet the computer industry was revolutionized in the space of a few years by hobbyists working in their garages who developed the concept of a "personal computer." The PC was derided by many manufacturers of "big iron" mainframe computers as a "toy" (which it was, at first). IBM and others were slow to appreciate the potential of distributing computing power to individuals. IBM is still a very powerful force in the computer industry. But none of the traditional mainframe or minicomputer manufacturers fully embraced personal computers in a timely way, and many faltered as a result. Today, the computer industry is populated by many high volume manufacturers that did not even exist twenty-five years ago, such as Compaq, Dell, Gateway 2000 and Micron Technologies.
The era of hobbyists working in garage operations that nobody ever heard of and developing the next new product to take the industry by storm is not simply a legend from days gone by, it's a story we hear all the time in this industry. Take Scott Cook of Intuit, for example. Scott developed the enormously popular Quicken personal finance software sitting at his kitchen table. And the precursor of Netscape Navigator was designed by undergraduate students at the University of Illinois in Champaign-Urbana who worked for the National Center for Supercomputing Applications. Amazon.com, which markets books on the Internet, is yet another example of one great idea that blossomed into a thriving company; Amazon.com opened its doors on the Internet in July 1995 and last year had revenues of $148 million. There are innumerable other examples of small entrepreneurs who have experienced great success by pursuing their good ideas, and such opportunities will continue to expand as personal computers become more ubiquitous.
The rapid rise of Netscape and the popularity of Sun Microsystems' Java programming language provide further examples of the rapid change that characterizes the computer software industry. I am pleased that both companies are represented here this morning. Netscape was formed in April 1994 and released its first product, the Navigator web browser, a few months later. Within a year of that Netscape went public. On the day of its initial stock offering - just fifteen months from the day the company was formed - Netscape had a market capitalization of $2.2 billion. The creation of such vast wealth in such a short period of time is virtually unheard of in any industry other than computer software.
Similarly, Sun's Java programming language emerged from nowhere to become one of the most highly-touted products in the history of the computer software industry. In fact, Java has become something of an overnight sensation. Sun introduced the new language in May 1995, and just seven months later was portraying Java as "the de facto standard" for writing applications for the Internet. While Microsoft does not share all of Sun's ambitions for Java, we agree that it is a very valuable tool for software developers, and we have devoted substantial time and energy to creating what we believe are the best Java tools available in the market-place. Microsoft's implementation of Java has consistently won the reviews in the technical press and Microsoft actually delivers Java on more operating systems than Sun. If the computer software industry was not as dynamic as it is, a new product like Java could never have emerged to challenge established programming languages.
The Rise of the Internet and Its Promise of Boundless Opportunities
Microsoft's acute awareness that today's success story could easily become tomorrow's has-been is reflected in the company's stark rallying cry: "Innovate or Die!" Nowhere is that attitude more evident than in Microsoft's response to the emergence of the Internet as a powerful new force in computing. Microsoft has always recognized that there would be a very large network developed to interconnect computers around the world, i.e., the network commonly referred to as the Information Superhighway, but it is no secret that we did not immediately recognize that the Internet would become that network. I am proud to say, however, that as a result of a truly outstanding effort by our employees, the company has transformed its product line in a very short span of time to take best advantage of the possibilities the Internet provides. It is the ability to reinvent itself in response to rapidly changing consumer demand that makes Microsoft the successful company it is.
Of course, Microsoft's competitors have also seen opportunities in the dramatic increase in the popularity of the Internet. Since 1995, a number of Microsoft's most formidable competitors have banded together to promote a variety of new Internet technologies that they believe will greatly diminish the value of Windows and other Microsoft products. Indeed, some have suggested that the entire concept of a "personal computer" will soon be rendered obsolete by a new breed of "network computers" or "information appliances" that do not run any Microsoft software. Microsoft welcomes this competitive challenge and has responded by focusing its creative energies on developing technologies that it believes will best serve the needs of consumers in an era of Internet computing.
The swiftness with which people around the world have taken to the Internet is simply amazing and is powerful evidence that no company in the computer software industry can afford complacency. Microsoft is working hard to identify and pursue the many long-term opportunities that the Internet affords. Virtually everything we do these days at Microsoft reflects our conviction that the Internet is going to continue to grow. I believe that almost everyone in the developed world and huge numbers of people in the developing world will be using the Internet within the foreseeable future. Access to these technologies and the benefits they offer promises to have far-reaching effects on the way we live and work and learn, many of which we cannot even imagine today.
The Internet and the boundless opportunities it provides fits squarely within Microsoft's original vision of "a personal computer on every desk and in every home." It also will contribute to our "information at your fingertips" vision.
One of the greatest benefits provided by the Internet is its use as an educational tool. Students are using it to send e-mail messages around the world, learning about different cultures while making new friends. With the price of PCs dropping to all time lows, students attending schools in poor areas or remote locations will be able to use the Internet to gain access to the same library resources as students attending a school in McLean. The possibilities of improving educational opportunities for all children are endless and exciting.
Microsoft's focus on the Internet has not met with universal acclaim, however. There are those detractors who allege that Microsoft will use its Windows operating system to gain a chokehold on the Internet and thereby extract a royalty for every Internet-related transaction. Mr. Chairman, I can say without hesitation that it is not, nor has it ever been, the intention of my company to turn the Information Superhighway into a toll road. Microsoft has always supported open access to the Internet, and this philosophy is clearly demonstrated by Internet Explorer 4.0. The IE 4.0 technologies in Windows 95 provide unfettered access to any of the hundreds of thousands of Web sites around the world. There is absolutely nothing in IE 4.0 that prevents consumers from taking full advantage of the Internet, and any attempt to do so would run counter to the very thing that makes the Internet so appealing - the ability of individuals to decide for themselves what information they will see. If IE 4.0 did not enable such open access to the wealth of information on the Internet, it would quickly be replaced by other software that did provide the open access that consumers demand.
In any case, it is preposterous to think that any one company could ever control access to the Internet. The openness of the Internet is inherent in its architecture. The information on the Internet is distributed across thousands of computers around the world, and there are an essentially infinite number of access points to that information. As a result, the Internet is the antithesis of the giant computers sometimes portrayed in science fiction that contain all of the world's information and are subject to the control of governments or private parties. Any developer of web browsing software foolish enough to attempt to restrict access to the Internet or charge a "toll" for such access, without adding real value to the transaction, would find itself out of business literally overnight. Customers would quickly flee to competitors who did not seek to impose such charges.
Within the past two years, Microsoft has revamped all of its major products to reflect the company's intense focus on the Internet, and many more technology initiatives are underway. From the outset, Microsoft planned to include Internet related technologies in Windows 95, and such technologies were included in the very first version of the operating system released to computer manufacturers in July 1995. (Windows 95 was code-named "Chicago" during its development, and the Internet-related technologies - now called "Internet Explorer" - were code-named "O'Hare," i.e., a point of embarkation to distant places from Chicago.) It is this decision to include Internet-related technologies in Windows 95 that is the subject of the pending litigation with the U.S. Department of Justice.
Government Intervention Threatens the Industry's Ability to Continually Innovate and Remain Competitive
To remain competitive and to continue to provide consumers with high quality, low cost, innovative products, Microsoft and other U.S. software companies must retain the ability to design their products free from government interference. The current case is a good example: the DOJ is attempting to require Microsoft to offer Windows without important Internet-related aspects of the operating system, depriving consumers and software developers of the benefits of compatibility provided by a common platform like Windows. If the DOJ succeeds with its efforts to limit Microsoft's ability to improve Windows, software developers will be less likely to create innovative new products that take full advantage of Windows and consumers will be unsure whether applications will work properly with the version of Windows installed on their PC.
For more than seventeen years, we have consistently built new features into our operating systems, just as our competitors have enhanced theirs. This has included improvements like the graphical user interface, memory management, true type fonts, disk compression and networking. Every one of these was available first as a separate offering, but eventually was integrated into the operating system to meet the needs of customers who want the simplicity and comfort of knowing that all parts of Windows will work together seamlessly. The additional capabilities built into the operating system, especially browsing technology, are also important to thousands of software developers that take advantage of those capabilities in building their own new products.
Providing the ability to access information stored on the Internet is a logical next step in the development of an operating systems like Windows. A core function of any operating system is to allow computer users to access information storage devices wherever they may be located, i.e., whether those information stores are local - such as hard disk drives, floppy disk drives, tape backup drives or CD-ROM drives - or remote - such as servers on local and wide area networks. As I noted previously, the Internet itself is a very large information store that resides on a global public network. As a result, it makes perfect sense for Windows to provide access to the Internet so that the wealth of information on the Internet is available to all applications running on top the operating system. This explains why virtually all modern operating systems include a variety of Internet-related technologies, including Web browsing capabilities, with their products. Indeed Mr. Chairman, just last month your constituent, Novell, announced that the latest version of its popular operating system, recently renamed IntranetWare, which is due to be released later this year will incorporate Netscape web browsing technology as an integrated part of the operating system. And Sun has recently announced that beginning in March, its Solaris operating system will come with Netscape Communicator preinstalled along with its own HotJava browser.
My point is not that the DOJ should challenge what Novell and Sun are doing. My point is instead that the inclusion of Internet-related technologies in modern operating systems is the norm, and reflects a recognition that such technologies are necessary to meet consumer expectations. The government should not stand in the way of logical and useful technological progress, any more than the government should have blocked earlier efforts to improve operating systems by including support for other types of networking.
In short, while I certainly agree that the government should work to ensure that competition is not stifled by collusion or other plainly illegal activities, I think that the government should be extremely wary of interceding in an industry like computer software that is working so well on its own. As I hope my testimony today has made clear, the computer software industry is not broken, and there is no need to fix it. It is a thriving and vibrant sector of the U.S. economy and the envy of the rest of the world.
Microsoft's Size and Place in the Computer Software Industry
Finally, Mr. Chairman, given the subject of today's hearing and the recent media attention on various challenges to Microsoft, I am compelled to say a word about Microsoft's size and place in the computer software industry. Mr. Chairman, Microsoft is often referred to as a "software giant." The facts, however, tell a different story. While Microsoft is clearly a leader in the computer software industry, our revenues account for less than 5% of total worldwide software revenues of $253 billion and only 1% of the information technology industry's collective revenues of $1 trillion. More than a dozen companies, including industry leaders such as IBM, Hitachi, Computer Associates, Oracle, Digital Equipment, Novell, Sybase and Sun Microsystems have more than $1 billion in annual software revenues alone. IBM's software revenues of $13 billion in 1997, are about the same as Microsoft's. And revenues for many of these companies have soared in recent years. (For example, Oracle's revenues rose from $1.2 billion in 1993 to $5.7 billion in 1997; over the same period, Sun's revenues rose from $4.3 billion to $8.6 billion.)
As is suggested by Microsoft's relatively small revenue share, the computer software industry is highly fragmented. There are more than 44,000 software companies in the United States alone, and thousands more overseas. The top twenty independent software publishers (a group that includes Microsoft) account for just 42% of total revenues from packaged software. By the standards of antitrust analysis, the computer software industry is thus highly unconcentrated. The industry is also largely based in this country: nine of the top ten software companies in the world are American.
Microsoft is perhaps best known for developing and marketing operating systems, such as its Windows family of products. Here again, however, we face intense competition from many sources. Dozens of operating systems are available for a variety of computers, ranging from new generations of so-called "information appliances" (such as handheld personal computers or "smartphones") to powerful mainframe computers. IBM alone offers a range of operating systems that include PC-DOS and OS/2 (for personal computers), AIX (for mainframes, servers, workstations and personal computers), OS/400 (for minicomputers), and OS/390 and other mainframe operating systems. Other major operating system vendors include Apple (Macintosh), Novell (IntranetWare), Sun Microsystems (Solaris and JavaOS), Hewlett Packard (HP/UX), Digital Equipment (VMS and Digital UNIX), Lucent (Inferno), Santa Cruz Operation (OpenServer and UnixWare). Overall, Microsoft accounts for just 13% of all operating system-level software revenues (a product category that includes operating systems and related software such as utilities).
Mr. Chairman, let me be very clear on this point -- Microsoft does not have monopoly power in the business of developing and licensing computer operating systems. As you know, a monopolist, by definition, is a company that has the ability to restrict entry by new firms and unilaterally control prices. Microsoft can do neither. Software exhibits none of the barriers to entry that characterize traditional industries like mining or manufacturing. A new competitor needs little in the way of physical infrastructure. Distribution costs are low (software can be transmitted around the world nearly instantaneously). The principal assets required to create excellent software are human intelligence, creativity, and a willingness to assume entrepreneurial risk, all of which are in abundant supply in this country. A software product is the copyrighted expression in lines of code of ideas. No one can monopolize new ideas that can be implemented in software.
With regard to pricing, the market pressures we face compel Microsoft to price Windows competitively. In fact, the price of Windows has remained virtually unchanged over the years, while its performance and features have increased dramatically. Today Microsoft Windows is one of the central technologies contained in most new PCs, yet it accounts for less than 3% of the cost of a typical PC. If Microsoft truly had monopoly power, it would be free to increase the prices for its operating systems with no need to innovate. A monopolist is lazy, charging prices above competitive levels for products that are rarely improved because no one else can offer alternative products to consumers. In contrast, Microsoft spends ever larger sums each year on research and development to deliver better operating system technology at affordable prices.
Mr. Chairman, I have been tremendously fortunate to be a part of an incredible industry like computer software during such an exciting period, but I firmly believe that we have only just scratched the surface; the greatest advances in the computer industry are yet to come. And Microsoft is working hard to unleash the power of personal computing to the benefit of everyone. Already we are working on operating systems that will enable personal computers to recognize users when they enter a room, respond accurately to voice and handwritten commands, and serve as highly efficient communication, productivity and entertainment devices. And, of course, we are devoting significant resources to developing the technology that will enable users of the Internet to realize its full potential. There is much more we can and will do to make the Internet more accessible and to give consumers good reasons to want to use it more.
As we push to develop these innovative technologies, we also will continue to contribute to the community in ways other than developing excellent products. For instance, we intend to broaden and expand our many education initiatives, including our Access to Technology program, through which we donated $80 million in software to schools and libraries across the country last year alone. I have a personal commitment which is shared by others at Microsoft to help ensure that every child in this country has access to the information and technology they need to learn.
I have always been concerned about education. I was blessed to have had many good teachers while I was growing up, but now that I am a father, I am even more concerned about how children can benefit from the huge quantities of information that are now so readily available. I've seen from personal experience how giving kids the right tools enhances their ability to learn and sparks their interest in and enthusiasm for learning. That is why I am proud of the contributions we have made through our Access to Technology program, and I have great hopes for its future success.
I am also proud of the many educational products we have developed at Microsoft, including Encarta, an interactive encyclopedia that makes it fun and easy to learn about the world. We will continue to develop such products and invest resources to create even better learning tools in the future. We will also continue to respond to parents' demands for the necessary software products to enable them to protect their children from unwanted and unwholesome material from the Internet. And we will certainly continue to work with persons with disabilities to make our products accessible to these individuals who truly depend on computers in their personal and professional lives.
Mr. Chairman, Microsoft will continue to compete vigorously in the computer software industry, listen to our customers, and work hard to create new and innovative products at low prices. If Microsoft fails to keep pace with technological change and is outstripped by its competi-tors, let it be because we failed to innovate fast enough, not because we were hobbled by government intervention in our efforts to develop new products that meet the needs of consumers.
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