Microsoft 2006 Annual Report Download - page 18

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In December 2005, the Korean Fair Trade Commission (“KFTC”) completed an investigation of whether including streaming
media technology or instant messenger technology in Windows, or including Windows Media Services as an optional component
of Windows Server, violates the Korean Fair Trade Law. The KFTC ruled that we had violated the law and issued a remedial
order requiring us to offer two versions of Windows PC operating systems, one with Windows Media Player and Instant
Messenger removed and another with those functionalities but also including opportunities for OEMs to install competing media
player and instant messenger programs. If upheld on appeal, these remedies could adversely affect the utility and competitive
position of Windows PC operating systems in the Korean market.
We believe our integrated approach to delivery of product innovation benefits consumers and business. Current or future
government regulatory efforts and court decisions may hinder or delay our ability to provide these benefits thereby reducing the
attractiveness of our products and the revenues that come from them. Moreover, there always remains the risk of new legal
action, either by these or other governments or private claimants including with respect to products or features that haven’t
been scrutinized or been the subject of objections in the past. The outcome of such legal actions could adversely affect us in a
variety of ways, including:
• We may have to design or develop alternative versions of products for specific geographical markets to remove or limit
visibility of certain functionality, resulting in reduced customer benefits or additional costs and delays in the release of
product lines or specific product versions.
• Mandated alternative versions of our software may cause confusion that harms our reputation, including among
consumers and with third-party software and Web site developers who rely on the functionality removed from these
alternative versions.
• Competition authorities may authorize competitors to distribute implementations of Microsoft communications protocols
in source code form without proper contractual provisions to protect our intellectual property.
• We may have to disclose otherwise confidential and trade secret information concerning the operation of our software
that may facilitate the development of competing software.
• If not reversed or limited on appeal, the rulings described above may be cited as a precedent in other proceedings that
seek to limit our ability to continue to improve Windows by adding new functionality in response to consumer demand.
Our online offerings are subject to government regulation of the Internet domestically and internationally in areas such as
user privacy, data protection, and online content. The application of these laws and regulations to our business is often unclear
and sometimes may conflict. Compliance with these regulations may involve significant costs or require changes in business
practices that result in reduced revenue. Noncompliance could result in penalties being imposed on us or orders that we cease
conducting the noncompliant activity.
Our business depends largely on our ability to attract and retain talented employees. Our business is based on successfully
attracting and retaining talented employees. The market for highly skilled workers in our industry is extremely competitive. We
are limited in our ability to recruit internationally by restrictive domestic immigration laws. If we are less successful in our
recruiting efforts, or if we are unable to retain key employees, our ability to develop and deliver successful products and services
may be adversely affected.
Delays in product development schedules may adversely affect our revenues. The development of software products is a
complex and time-consuming process. New products and enhancements to existing products can require long development and
testing periods. Significant delays in new product releases or significant problems in creating new products could adversely
affect our revenue.
We make significant investments in new products and services that may not be profitable. We have made and will
continue to make significant investments in research, development, and marketing for new products, services, and
technologies, including Windows Vista, the 2007 Microsoft Office system, Xbox 360, MSN Search, Windows Server and Windows
Live. Investments in new technology are inherently speculative. Commercial success depends on many factors including
innovativeness, developer support, and effective distribution and marketing. Significant revenue from new product and service
investments may not be achieved for a number of years, if at all. Moreover, new products and services may not be profitable,
and even if they are profitable, operating margins for new products and businesses may not be as high as the margins we have
experienced historically.