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3 November 1998

Microsoft welcomes the opportunity to comment on the European Commission’s Working Document on the regulatory implications of convergence. We appreciate the Commission’s consultation with industry in examining the regulatory framework for converging technologies, as well as the opportunity to respond to the Commission’s call for further reflection.

The Scope of Convergence. The scope of the convergence phenomenon is extraordinarily broad, and limiting a review to any specific set of industries is to some extent artificial. Beyond audiovisual broadcasting, convergence is already having a profound effect on other content industries, such as book and newspaper publishing. Electronic commerce is leading to fundamental shifts in industries such as banking and retail sales of all kinds. Further advances in information technology will affect a range of diverse industries, and terms such as "information technology" and "consumer electronics" are scarcely sufficiently broad to comprise the variety of information appliances that convergence will bring forth, from hand-held communicators to set-top boxes and a host of other new and as yet unforeseen end-user products. The extraordinary scope of the convergence phenomenon provides important perspective as traditional regulatory models are reviewed.

Traditional Premises of Regulation. Convergence is changing many of the basic premises on which traditional regulation has been based. The Internet and the World Wide Web should be seen as the new paradigm for the opportunities and challenges of regulation in the converged environment. Spectrum scarcity in its traditional form will become a thing of the past, and distribution capacity will no longer be a zero-sum game. Management and ownership will be decentralized, and governments, industry participants and consumers will participate via millions of independent links, acting only by consent and choosing among a broad variety of content services. Content distribution and access will be interactive, no longer the one-way street from the broadcaster to the consumer that characterized traditional broadcasting. Technological innovation will continue to spread rapidly in traditionally stable industry sectors.

Convergence is an Opportunity. Such fundamental and rapid change poses challenges to governments and industry. Governments must rethink established regulatory models, and previously protected industries must adapt to competition they have never before experienced. At the same time, convergence offers great promise in making available better services at lower cost, giving consumers unprecedented access to information, education, and entertainment. Europe can and should remain at the forefront of this digital revolution not by restraining the market, but by supporting the market and fostering innovation, competition, and growth. The public interest – and most of all the individual consumer – will benefit from the Information Society.

Microsoft supports the Commission’s efforts towards continuing liberalization of the telecommunications sector. Opening networks to competition is the key to falling prices. As the costs of computing power and equipment continue to fall, telecommunications costs will be an increasingly important factor in determining who has, and who has how much, access to converged services. The development of the Internet demonstrates that the success of the more broadly converged environment will be highly sensitive to the pricing of local and high-speed communications services.

Inexpensive communications will be a key factor in achieving one of the most important policy goals for regulation of convergence: making reasonably priced services available to all. This is fundamental if we are to avoid a society of "haves" and "have nots" in the digital environment. European regulation in the telecommunications sector has made a major contribution to realizing this goal. Future technological development is likely to support the Commission in this endeavor, as local loop, wireless, satellite and other networks foster competition. Microsoft agrees that regulation should focus on securing competition, and on providing a stable, technology-neutral regulatory environment to foster investment in the deployment of such competitive networks.

In light of recent European Commission competition law enforcement cases involving set-top boxes, it is not surprising that "digital gateways" have attracted considerable attention in the convergence debate. At the same time, given the uncertainty regarding how the converging environment will develop, it is no surprise that the concept of "digital gateways" is not fully understood. In assessing the need for regulation of conditional access systems, electronic program guides (EPGs) and application programming interfaces (APIs), it is important to focus on what they really are, and what they are not, and on the trends that are moving the industry today.

Conditional access is an area where the EU has already asserted its regulatory authority. Pursuant to Directive 95/47 on the use of standards for the transmission of television signals, the EU has established a regulatory system for digital television conditional access systems. In addition, the European Commission has been successful in using competition law to block the perceived threat posed by vertically integrated consortia involving telecommunications providers, broadcasting, set-top boxes, and content libraries.

Experience in such areas should not, however, lead the EU to automatically approach other aspects of convergence in the same way. Conditional access systems and pay-TV are perhaps the leading examples of "digital gateways," and concerns that individual broadcasters might be excluded from making their programming or program information available through a set-top box controlled by another service are understandable. But such concerns will not apply broadly to new services as convergence progresses.

Conditional Access. Conditional access systems themselves are likely to change. Although conditional access systems typically have required the use of a dedicated set-top box, in the future, set-top boxes likely will accommodate a variety of conditional access systems. This may be the result of descrambling capability in the box, the employment of modular technology allowing a set-top box to accommodate a variety of conditional access systems, or the use of as-yet unforeseen future innovations.

TV and Internet Convergence. Similarly, not every set-top box is a conditional access system in the traditional sense. Rather than conditioning access to a closed "bouquet" of television programming that is not available elsewhere, the functionality of WebTV, for example, is to allow television viewers to access the Internet. Using a standard telephone line and a connection to a TV, with WebTV the television can be used to send and receive email, to access the content of the World Wide Web, and to enjoy integrated viewing of television and the Internet together. If it is not filtered out by the viewer as being undesirable, no content available on the Web is "locked out" by WebTV.

Open Functionality. As a software company, our focus is less on the set-top box, receiver or other hardware into which a new technology is incorporated, and more on the functionality that a new technology provides. Our experience in the PC industry and with developing trends on the Internet suggests that the most open platforms -- and not those that restrict access, like conditional access systems -- ultimately will prevail in the converged environment.

As computer performance increased and the price of computing power decreased over the past twenty years, vertically integrated (or "closed") systems requiring hardware and software from a single or limited number of manufacturers quickly fell by the wayside in competition with open systems. These open systems feature compatibility and interoperability of components from a range of hardware manufacturers and a large variety of available applications programs from different software publishers. A similar trend has become visible in Internet services, as closed networks increasingly are being abandoned in favor of open systems and portal approaches. This is true, for example, of our own Microsoft Network (MSN) and other Internet services, where early "walled garden" systems that limited network access to service subscribers frequently have been left behind in favor of networks based on Internet standards (most importantly html, as discussed further below), which allow access to anyone having an Internet connection and standard Web navigation software.

Consumer Choice. These trends are not surprising. Consumers want freedom to choose, and do not want to be "locked in" to any particular content or service. Rather than creating "bottlenecks," the digital environment will make available a host of different and competing content delivery mechanisms – the Internet, cable, satellite as well as terrestrial broadcasting. In such an environment, success will go to competitors who offer the best quality system and the greatest degree of openness.

Consequences for Regulation. Conditional access systems are an important, but also a narrow issue in designing the regulatory environment for convergence. Existing EU regulation of conditional access systems, supplemented by competition law, is sufficient in this area, and it is unnecessary and undesirable to extend principles of conditional access regulation developed in the unique broadcast environment to the broader market. In that market, consumers will choose those systems that provide the greatest degree of (rather than restricting) access. Regulatory models duplicating the function of competition law and administered by separate regulatory authorities would do more harm than good. Increasingly, the market itself will punish those seeking to restrict access, while rewarding service and content providers pursuing open business models.

For similar reasons, we believe that there is no need at this point for sector-specific regulation of Electronic Program Guides (EPGs). The value of any EPG will ultimately be measured by the flexibility it offers. Given a choice, users will naturally select program guides that allow them access to the most goods and services and offer the greatest opportunities for customization, not EPGs that tie them into limited "umbrellas" of programming.

EPG Templates vs. EPG Content. In discussing EPGs, it is important to distinguish between the platform or "template" on which program data are made available, and the program data services themselves.

• EPG templates are the platforms on which program data are written, stored and made available to the user.

• EPG data services then actually populate the guide with program information, such as TV listings and program descriptions.

As convergence progresses, we believe that success will go to templates offering the greatest degree of flexibility to program data service providers and viewers, and EPG data services offering the richest variety of content and the greatest opportunities for customization by the viewer.

The WebTV EPG Template. The WebTV platform includes an EPG "template" on which program data can be made available to the viewer. The WebTV EPG template is open to many different "guide data" services and is a platform on which other companies can offer a variety of rich data services. Like other software platforms, an EPG template without data is of little interest or value to consumers, and Microsoft encourages content providers to provide data services to populate the WebTV EPG template with useful information. The technology is available to any developer that wishes to use it. Much like our other software platforms, the WebTV EPG template has been designed to provide value for content providers by simplifying the content development and distribution process, providing compatibility with hardware platforms from a wide variety of vendors, and by reassuring EPG data service providers that their resources will not be tied to a limited broadcast system.

Future Innovation. EPGs are an area in which a range of future innovation is to be expected. Besides simple program listings, EPGs will offer a variety of supplementary services, such as program descriptions and reviews from multiple sources. EPGs will also offer customization, allowing consumers to rearrange the order in which program information is displayed, to filter out program information they feel is undesirable, and to highlight programs in areas in which they have a special interest. EPGs ultimately will allow choice within individual programs themselves, for example by allowing sports viewers to choose among camera angles to give the perspective they find most appealing. An EPG's success will grow with the degree of functionality it provides.

Consequences for Regulation. An assessment of the need for regulation of EPGs should not simply extrapolate from specific instances in which vertical integration involving control over content and networks has raised concerns to date. Competition law is adequate to address such concerns. The market itself – and users in particular – will push towards open systems offering the greatest degree of consumer choice. Open EPG templates will make it more difficult, not easier, for vertically integrated broadcasters to exclude other broadcasters' program information from their services. Regulators should be careful not to hamper technological development in this area, where competition best promotes content diversity and access.

Application Program Interfaces (APIs) are used in too many different forms and in too many different devices to be made subject to any single set of regulatory rules. In the Commission’s Working Document, we understand the focus to be on APIs used in conditional access systems, where they might be viewed as a "gateway" to digital services. As evidenced by Directive 95/47, in this context APIs are closely related to the Commission’s consideration of standardization.

Mandated Standardization. Microsoft believes that the example set in Directive 95/47 on television transmission standards – in effect requiring compliance with mandated standardization – may be warranted in some circumstances, for example where conditional access technology may be used by vertically integrated systems to lock out programming deemed to be in the public interest. Regulatory endorsement of official standardization efforts has, of course, also played an important role in achieving the single market in Europe, where national standards and regulations in the past have acted as an obstacle to the free flow of goods across national borders.

Regulators should, however, be very careful in extending mandated standardization to new areas. Unwise standardization may produce a number of unwanted results. It may impose a "technology penalty" by slowing the pace of innovation. Mandated standards may become commercial flops or may be overly complex for users to implement. The benefits of formal standards in any field are necessarily limited by the vast number of different user needs, the speed with which technology changes, and the time required to develop such standards.

Microsoft strongly supports the general consensus identified by the Commission that standardization should be voluntary, industry-led, and market driven. Market based standardization spurs investment and innovation as market participants strive to achieve market acceptance for their technology. Experience with the PC platform and with the development of standards for the Internet (such as HTML) shows that market driven standardization will favor open systems providing interoperability and data interchange, broad applications and hardware choice, and migration flexibility, regardless of how many formal "standards" a given technology incorporates.

The Open Systems Model on the PC Platform. On the PC platform, our business model has long been based on the rapid development of innovative software that responds to consumer demands, broad distribution of that software at attractive prices, and close collaboration with other hardware and software companies to foster development of compatible products. This is illustrated by the process by which we work to ensure that our APIs are widely accepted and broadly available in the industry:

• First, we run an elaborate program, beginning at the earliest stages of the development process, to solicit input and feedback from programming professionals about the development of our APIs. (Traditionally, third-party software developers have played little role in the development of software; their contribution essentially was limited to testing for "bugs.")

• Second, Microsoft devotes very substantial resources to upgrading its products to ensure that they will provide the functionality that software developers need to create their products.

• Third, Microsoft actively promotes its APIs to software developers and devotes a large part its workforce to developer support.

• Fourth, Microsoft seeks to ensure the widest possible distribution of its software. Naturally, many software developers prefer to target the largest possible base of prospective customers when creating new products.

This strategy contributed significantly to the phenomenal success of the PC in the early 1980s. Using market standard microprocessor technology and widely licensed software, many independent vendors were able to produce compatible PCs and peripherals and to compete in selling them at lower prices. As the number of PCs (the "installed base") grew, so did the number of software developers and the number of affordable applications programs. This applications-rich environment was crucial in attracting yet more PC users and developers. This process was self-reinforcing and continues today. Similar synergies will drive developments in a converged environment.

The HTML Example. Technologies and specifications from a variety of sources, including individual market participants, industry consortia or official bodies, can have the effect of standards by achieving and maintaining broad market acceptance. By the same token, specifications developed by any such source can fail as platforms for true compatibility and interoperability if they fail to gain and maintain broad acceptance among users. The Internet provides excellent examples of how standards can be developed successfully by industry participants in an open process and with public support, without the need for regulation.

One such Internet standard, Hypertext Markup Language (HTML), has become the universal document format for publishing content on the World Wide Web. The standard is administered by the World Wide Web Consortium (W3C), which was established in 1994 in collaboration with CERN and the European Commission and now operates under the auspices of prominent educational institutions, including INRIA in France. W3C's member organizations from around the world participate in the continuous further development of HTML. W3C has contributed to the success of HTML because it has operated effectively as a standards body, making significant contributions to the industry and keeping up with the rapid pace of innovation on the Internet.

Microsoft participates in W3C, and we are committed to following the architectural principles guiding the group and to implementing the ideas that have achieved consensus within it. Support for HTML means that users can display World Wide Web content on our software, and can use our software to write content for display on the Web. HTML is also the backbone for the Microsoft Network, which opens MSN to anyone having an Internet connection and standard Web navigation software. As the Internet and television broadcasting converge, Microsoft also supports the HTML format within the Digital Video Broadcasting (DVB) group in the interest of achieving a single lingua franca for content of all kinds in the online world.

Consequences for Regulation. The openness of a standard depends on factors such as compatibility and interoperability, broad applications and hardware choice, and migration flexibility, and not on how many formal "standards" a given technology incorporates. Experience with the PC industry and the Internet strongly suggests that the need for compatibility and the attractiveness of increased functionality in the converging environment will provide a strong incentive for open models. APIs and standards developed by individual market participants, by industry consortia, or by official standards bodies can become successful if they gain and maintain acceptance among users. But by the same token, APIs and standards should enjoy "freedom to fail" regardless of who happens to be their sponsor, and only in truly exceptional circumstances should regulation mandate the use of specific standards or APIs.

Convergence is leading to fundamental changes in the creation, distribution and availability of content. Content creation will become easier. Low barriers to entry make the Internet, for example, the least expensive means of publishing information or offering services on a worldwide basis. It is possible to publish a web site with standard computer equipment, affordable software, and a local communications link. Content distribution will be facilitated, because providers can easily make their content globally available. Already users all around the world can easily download music, video, magazines, books, and a variety of other materials from the Internet. This promises great benefits to consumers, as well as to content producers in Europe and elsewhere. The effects will be greatest in those areas where producers of creative content hitherto have experienced difficulty in distributing their products and services. The availability of content will be enhanced, as an ever-greater variety of content becomes even more easily accessible to users.

Important principles for regulation in this environment include providing a stable and transparent regulatory environment, protecting intellectual property rights (IPRs), and creating technology-neutral rules.

Creating a Stable and Transparent Regulatory Environment. Regulatory uncertainty is already a barrier to convergence. The most effective way to remove such uncertainty is to deregulate traditional communications sectors, such as broadcasting, and to rely principally on the application of general competition law, which provides well-understood principles for business practice and protects public policy interests. Ex ante regulation tied to definitions of specific communications markets cannot keep pace with technological change. The advantage of general competition law is that it centers on the application of flexible principles in a case-by-case manner. This allows industries to innovate while permitting governments to act against transactions or business practices that restrict market choice.

IPR Protection. Strong intellectual property rights protection is essential to fulfilling the potential of convergence. Such rights assure the creators of intellectual property in software, hardware, and other fields that their innovations will be protected. They provide market-based incentives and rewards for creation of content – the very content that users seek in accessing these services. Intellectual property rights holders must be free to pursue individual, market-based rights management in order to ensure full protection of rights.

Regulation Should Be Technology-Neutral. Governments should work to ensure that regulators apply a uniform, consistent, and technology-neutral body of regulatory principles. To the extent regulation is necessary, services should be regulated regardless of the means by which they are delivered. Sector-specific or technology-specific regulation threatens to distort the market. Governments should not take sides as technologies compete.

Microsoft agrees that it is important to analyze carefully the balance between public interest objectives and the need for a light-handed approach to regulation, especially in the era of convergence. Key issues include guaranteeing the broadest possible access for everyone, dealing with harmful content, protecting personal data, and addressing the enforcement challenge posed by illegal content.

• Universal Access. Perhaps the single most important goal in the era of convergence is to ensure that everyone has access to the Information Society, avoiding the creation of "haves" and "have nots." This means ensuring affordable connection to services. In the private sector, the decreasing costs of software, hardware, and communications are bringing us closer to the goal of universal access. For governments, facilitating access means keeping prices low, by continuing the liberalization of the telecommunications sector, encouraging investment in the construction of new bandwidth for data transmission, and streamlining regulation to encourage use of the Internet and other new technologies.

• Protecting Minors. At Microsoft, we support solutions that allow parents to take control in protecting minors from harmful content on the Internet. Industry self-regulation in the form of rating systems, in connection with software filtering technology, provides appropriate solutions to this challenge.

• Protecting Data. Microsoft supports the EU Data Protection Directive. We believe that the Directive, along with industry codes of conduct, technology tools and contractual arrangements, can effectively and flexibly protect data in the converged environment.

• The Enforcement Challenge. Microsoft believes that what is illegal in the physical world should be illegal in the digital world. The real challenge presented online is enforcement. At the same time, it is important to keep in mind the differences between traditional media and digital media when making decisions about regulation. Traditional notions of prior review of content by editors, for example, are rendered virtually impossible in the online world by the sheer volume and speed of information. Just as it would be impossible to screen telephone calls for slanderous content, Internet service providers cannot guarantee the legality of communication conducted through their servers. We believe self-regulation is the most proportional response: service providers and others should be expected to notify authorities and remove unlawful content when it is brought to their attention. Individuals, of course, should remain liable for their own illegal behavior online.

The Internet should be seen as the new regulatory paradigm. The Internet has been characterized by rapid growth and dynamic innovation precisely because regulators have allowed the market for Internet services to operate without interference. Because it is decentralized, international, and transactional, the Internet presents opportunities not present in more traditional broadcasting or telecommunications. The digital world of convergence shares these important characteristics.

• Careful Review of Regulatory Objectives. New regulations should be created only where they are clearly justified by important governmental objectives, are the best way to achieve those objectives, and are no broader than necessary. Where governments do regulate, harmonized rules throughout the EU are the best way to avoid market distortions.

• Encourage Self-Regulation. There should be a strong presumption in favor of self-regulation in the absence of evidence that specific public interest objectives are not being met.

• Platform Neutrality. As noted above, governments should work to ensure that regulators apply a uniform, consistent, and technology-neutral body of regulatory principles. Regulation should not distort the market as technologies compete.

The Green Paper is correct to state that public interest objectives should be carefully enumerated beforehand, not used as a talisman or ad hoc justification for regulation. The Commission and the Member States should review the continuing vitality of such objectives. In many cases, technological innovation and competitive market forces will produce the policy outcome (for example, diversity of programming and widespread access) that traditional regulation was designed to promote, thus rendering such regulation unnecessary.

Microsoft appreciates the opportunity to comment on the Commission’s Working Document on convergence. We are excited by the opportunities ahead, and we are grateful that the Commission will consider our views when deciding the important regulatory questions that convergence presents. We will strive to be an active partner at the forefront of the convergence era.