EC Gains on Microsoft’s Loss

As the dust starts to settle from Microsoft’s defeat in its appeal of the European Commission’s (EC) decision in Monday’s dramatic antitrust ruling, it appears that the EC gained more than the software behemoth lost — to some at least.

Monday’s ruling by the European Court of First Instance (CFI) upheld virtually all of the EC’s 2004 decision against Microsoft for abuse of its dominant market position.

However, that doesn’t necessarily have a big downside for the company, according to one expert in international antitrust law.

“The EC decision is something they were very keen on overturning … [but] I don’t think it will have a dramatic impact on Microsoft,” Tom McQuail, partner and antitrust specialist with law firm Howrey LLP in Brussels, told “I’m sure they’ll pick themselves back up.”

Monetizing bad luck

Microsoft, McQuail suggested, had already considered the consequences beforehand so it would be ready to move forward regardless of the decision.

One of the remedies demanded by the EC has had little effect. Per the EC’s 2004 order, Microsoft offers a Windows Media Player-free edition of both Windows XP and Windows Vista. Though they have been available to PC makers and consumers in the European community in the meantime, very few people have shown any interest in them.

Additionally, while the court’s ruling means that Microsoft has to make communications protocols — which it had unsuccessfully argued contained trade secrets — available to competitors, the CFI did uphold Microsoft’s right to charge for their use. That, it turns out, has been a sore point between Microsoft and the EC over how much is reasonable.

After being informed that its initial royalty rates were too high, the company set them at 1 percent of the affected products’ revenue but has solicited input from the EC as to whether those rates are fair.

“If that price is, in the commission’s view, still too high, it will be very important for us to understand what price is low enough, so that we can conform to all of our obligations,” said Microsoft general counsel Brad Smith during a press conference Monday afternoon in Brussels.

The one area where the CFI sided with Microsoft came when it ruled that the EC could not legally appoint an outside trustee to monitor the documentation-delivery process.

Microsoft was also ordered to pay the roughly $613 million in fines the EC had levied, as well as the EC’s court costs. An appeal is still ongoing regarding an additional $357 million fine for providing protocol documentation slower than ordered.

Becoming less ‘borg-like’

Since the 2004 ruling, Microsoft has made many moves to head off further litigation from all sides, including agreeing with U.S. antitrust regulators to enable users to choose Google’s desktop search engine as the default in Vista. Most recently, Microsoft announced expanded interoperability collaborations with Sun, whose complaint about Microsoft’s client and server protocol secrecy first spawned the EC’s investigation of the software firm in 1998, and Novell.

Additionally, some observers point to Microsoft’s recent loss in its attempt to gain fast-track approval for its Office Open XML formats as International Organization for Standardization (ISO) standards as a sign that the company’s dominance is being reined in by market forces.

Smith added that there is currently only one outstanding complaint that has been lodged against the company, and that was filed by IBM. That complaint regards licensing protocols that permit Microsoft Exchange and SharePoint Server to communicate, he said.

The company declined to comment on whether it would appeal the CFI’s decision. Such appeals can be made to the European Court of Justice, but only for questions of law.

Next page: The ruling heard ’round the world.

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After-the-ruling noise

All the usual suspects showed up to cheer for each side, and across the U.S., responses were predictable. The Software and Information Industry Association (SIIA), long a Microsoft critic, hailed the decision.

“Today’s judgment by the European appeals court is a victory for innovators and consumers everywhere,” said an SIIA statement attributed to Ken Wasch, president of the group. “With this action, the only option left for Microsoft is to immediately cooperate and fulfill the requirements of the March 2004 decision,” he added.

On the opposite side, Jonathan Zuck, president of the Association for Competitive Technology (ACT), a pro-Microsoft group, described the ruling as the beginning of a “dark period” for all kinds of IT-related firms.

“The precedent will threaten the ability of any successful company to protect its innovations. The conditions under which Microsoft will be obliged to give away its IP-protected information will be the key to gauging just how bad this is for the technology start-ups who depend on the value of their IP,” Zuck’s statement continued.

Surprisingly, after being mostly silent on the EC case, the U.S. Department of Justice (DoJ) had fairly strong words for the court’s ruling.

“In the United States, the antitrust laws are enforced to protect consumers by protecting competition, not competitors. In the absence of demonstrable consumer harm, all companies, including dominant firms, are encouraged to compete vigorously,” said a statement attributed to Thomas O. Barnett, assistant attorney General for the DoJ’s Antitrust Division.

“We are, however, concerned that the standard applied to unilateral conduct by the CFI, rather than helping consumers, may have the unfortunate consequence of harming consumers by chilling innovation and discouraging competition,” Barnett continued.

The DoJ’s statement may be partly a preemptive attempt to head off future actions on the EC’s part against both Microsoft and possibly other U.S.-based technology giants.

For instance, there are signs that, as predicted, a win by the EC may encourage further investigations of both Microsoft as well as other U.S technology firms such as Intel, Apple and Google.

Who’s next?

Though both sides were tight-lipped about the future, a statement from the EC hinted at what may come.

“The commission will carefully analyze the judgment and will consider its implications for future antitrust enforcement in these sectors and in others. It is clear, however, that this is an exceptional case with extremely harmful abuses by a company in a quasi-monopolistic position on a market,” the EC’s statement said.

In a separate statement, Neelie Kroes, European Commissioner for Competition Policy, called the decision “bitter-sweet” and lamented that Microsoft still retains 95 percent of the desktop operating system market. She added that, though the case has resulted in the EC’s actions being vindicated, the remedies and penalties have to date had little, if any, effect on Microsoft’s market dominance.

“On the markets concerned by the decision, businesses and individuals are faced with no more choice than they were three years ago when the commission adopted its decision. Microsoft’s market share has grown to 80 percent for workgroup servers — up from some 40 percent when the Commission’s investigation began. Microsoft’s media player format has, as a result of its conduct, come to dominate the market,” Kroes said.

Microsoft has pledged to work with the EC to implement whatever remains to be done, such as finish delivering interoperability information and work out royalty terms with competitors.

While Microsoft’s chief attorney Smith politely disagreed with Kroes’ assessment, he emphasized Microsoft’s view that much has changed since the investigation was originally opened and even in the three and a half years since the EC’s initial decision.

“Apple has something like a 70 percent market share for digital music; iTunes is far and away the leading source for music on the Internet; the iPod is far and away the leading hardware device for digital music; and Adobe Flash is far and away the leading Internet-based technology for the streaming of media, which was, in fact, the very issue that was the focus of the 1998 complaint that started a lot of the Media Player issue,” Smith said.

He went on to point out that Apple does not license its own communications protocol for the iPod or iTunes, and that Google holds as much as an 80 percent market share for search in some European countries. “Windows Server has done well, but has not grown as quickly in recent years as Linux has,” he added.

Smith couldn’t resist a barb aimed at IBM, which has dogged the company’s steps in Europe as recently as the ISO vote earlier this month: “IBM has 99-100 percent share for mainframe computers in Europe and the rest of the world.”

Still, the ruling strengthened the position of the EC’s competition watchdogs and definitely weakened Microsoft’s position in European markets and will likely give the company pause when it considers in the future how open it must be with rivals.

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