

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


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, weve witnessed a notable decline in consumer confidence that has people wondering whether were at a brief respite or whether weve 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 its 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, its not surprising that, as early as 1995, Bill Gates wrote in his book about what he called the
“Internet gold rush”
“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 theyd make money selling something else. The Internet, for example, was full of sites producing content for free, in the hope that somehow theyd generate revenue from sources that never materialized, whether it was advertising, subscriptions, or a wing and a prayer. As weve learned or really re-learned one cant build a business or our economic future on that type of flimsy foundation.


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, its 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:



In thinking about the technology foundation we need, its 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 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. Its 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.



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




  1. : a strong support community of developers

  2. : promote collaboration and interoperability while supporting innovation and healthy competition

  3. : promotes the growth of a profitable business

  4. : level of research and development investment drives resources for future innovation

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

Microsoft has fostered the worlds 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


  • Improving the feedback process in order to create better products for Microsofts customers and partners

  • Maintaining the integrity of our customers environments



  • Some examples of Shared Source already being implemented at Microsoft:









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 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 Microsofts statement of position today, many people will attempt to say that Shared Source is Microsofts failed attempt at being an Open Source Company. This could not be a more incorrect statement. Shared Source is 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


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 theyll 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 isnt successful in building a mass market and making powerful, easy-to-use software broadly accessible to consumers.


Finally, the fact that we believe strongly in the value of IP protection doesnt 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.

“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.

