RealTime IT News

Microsoft Blasts EU, Outlines Defense

UPDATED: Microsoft blasted the European Commission for finding it guilty of violating European anti-trust law, and began laying the groundwork for how it plans to appeal the EU's landmark decision.

The EC is "seeking to make a new law that will have an adverse impact on intellectual property rights and the ability of dominant firms to innovate," Microsoft said in a statement dated April 19th, 2004.

The statement, released Wednesday evening, provides detailed reaction to the EU's formal 300-page ruling, which was leaked to the Wall Street Journal before the EU posted the document on its Web site Thursday.

The EU's competition commission spelled out in detail why it found the company guilty of abusing its monopoly position with Windows.

On March 24th the European Commission announced that it would fine Microsoft a record US $613 million (497.2 million euro) after it found the company abused its "virtual monopoly" with its Windows operating system and broke European antitrust law governing competition. But according to the latest document detailing the ruling, the final fine amount was set at US $588.6 million, which is reportedly about twice the amount that Microsoft officials had been expecting after negotiations with the commission.

The EU ordered the company to also unbundle its Windows Media Player software from its operating system within 90 days. It also gave Microsoft 120 days in which to release server system code to other companies so that other software providers can interoperate with computers that run the Windows operating system.

The Commission said it would set up a "monitoring regime" to make sure Microsoft complies with the decision -- but Microsoft gets to propose a system and nominate a list of third-party overseers.

The commission also answered intellectual property objections raised by Microsoft, saying that compulsory disclosure of Windows source code isn't necessary; meanwhile, the order prohibits other companies from reproducing or altering the specs provided by Microsoft.

"In any event," the ruling said, "to the extent that this decision might require Microsoft to refrain from fully enforcing any of its intellectual property rights, this would be justified by the need to put an end to the abuse."

Analyst Melanie Hollands, president of hedge fund Koala Capital, pointed out that the commission didn't actually tell Microsoft to publish its server interfaces. She said the ruling doesn't really open Microsoft's platform up enough to make non-Windows ISVs happy.

However, the ruling acknowledged that European consumers would want to buy computer systems that include media players, but it said the decision on which to offer should be left to OEMs , which would respond to consumer demand.

"This decision does not purport to prevent Microsoft from entering into arrangements with OEMs to pre-install Windows and a media player (possibly Windows Media) on a client PC in order to meet the corresponding consumer demand," it said. "What is abusive is that Microsoft invariably imposes its own media player through tying."

Moreover, paragraph 992 of the ruling said Microsoft hadn't substantiated its claims that the integration of Windows and WMP code bases actually led to superior technical performance.

"Through tying WMP with Windows, Microsoft uses Windows as a distribution channel to anti-competitively ensure for itself a significant competition advantage in the media player market. Competitors, due to Microsoft's tying, are [presumably] at a disadvantage irrespective of whether their products are potentially more attractive on the merits."

Microsoft thus interferes with the normal competitive process which would benefit users in terms of quicker cycles of innovation due to unfettered competition on the merits, the ruling continued.

"Tying of WMP increases the content and applications barrier to entry which protects Windows and it will facilitate the erection of such a barrier for WMP," which ultimately would stifle innovation by other players.

"Moreover, tying of WMP allows Microsoft to anti-competitively expand its position in adjacent media-related software markets and weaken effective competition to the eventual detriment of consumers.

In its response, Microsoft said the decision "opens the door to intrusive regulation of product design -- not to mention a record fine -- based on a complaint by a single component supplier, even when this integration is the market norm and other suppliers continue to grow."

Microsoft said the commission's decision puts in bold relief two important questions:

"First, when does a firm with a dominant position have a legal duty to license its proprietary technology and intellectual property rights to its competitors so that they can incorporate that very same technology into their own directly competing products. The decision goes well beyond established legal precedents by asserting a broad and ill-defined duty on dominant firms to share the fruits of their research and development with other companies in the same product market."

Second, the statement continued, "when is it unlawful for a dominant firm to corporate new components or features that demonstrably improve its finished product?"

Microsoft said the commission's "tendency to define product markets narrowly and to hold that a firm is dominant if it has a market share as low as 30-40 percent, these rulings put at risk the economic incentives for a broad range of companies and industries."

The EC, looking to deter Microsoft from similar antitrust practices looking forward, said it gauged the fine according to the "gravity and duration of the argument" as well as any "aggravating or attenuating circumstances."

Microsoft has been on a legal settlement spree of late, paying off Sun Microsystems, InterTrust and the state of Minnesota in separate cases involving its business practices.

Microsoft has vowed to appeal the commission's ruling through European courts. In its statement, Microsoft said as "the case now heads for the Court of First Instance, the novel legal standards announced in the Decision will affect all industries, altering market dynamics and reducing incentives for research and development that are essential to global economic growth."

Susan Kuchinskas contributed to this story