Spinning Microsoft’s EU Troubles

While Microsoft mulls appealing a recent court decision that forces it to comply with antitrust penalties, attorneys are talking up — and down — the implications of the unbundling decision for the world’s largest software company.

According to a source familiar with the situation, Microsoft has retained a group of attorneys in Brussels whose only job is to “spin” the decision into more positive light for Microsoft. “That’s fair enough,” the source said. “That’s the nature of the game.”

The Dec. 22nd ruling by Europe’s Court of First Instance (CFI) forces Microsoft to comply with penalties imposed by the European Commission in March by removing
Media Player
from its Windows OS and allowing more licensing access to its server software protocols.

A Microsoft spokesperson said the company works with a number of lawyers in Brussels, where its main legal team continues to work on the case. The spokesperson had no comment about any attorneys retained separately to talk down or up any potential legal precedents and said Microsoft has not decided whether to appeal.

The development, however, helps underscore the arguments that are already underway among legal experts over the ruling.

That Microsoft must unbundle Media Player is “going to impose some difficulties, in terms of what they want to bolt on to their operating system in the future,” said Vincent Brophy, an antitrust attorney with the international law firm Jones Day.

Although no one expects a “Reduced” Windows version — without Media Player but for the same price — to inspire a lot of sales, the CFI’s ruling “means the company is now being told the way in which it can and cannot market its products,” Brophy added. “I think they can no longer take the view that they have a free hand. Instead, the company’s dominant position comes with extraordinary responsibilities to package their products in certain ways,” Brophy said. “Once that precedent is out there, it can be used around the world. This is a serious setback for them.”

Why is Microsoft optimistic? See page 2.

Continued from page 1


Microsoft, nonetheless, remained upbeat. During a telephone conference Dec. 22nd, the company’s chief legal counsel, Brad

Smith, spoke of optimism gleaned from the CFI’s decision.

Although the court was not convinced the company would suffer irreparable harm from complying with the penalties if it

ultimately wins its appeal, the court recognized a number of arguments, Smith said.

For one, the decision appeared to agree with Microsoft’s point that “the practice at issue here, the integration of

new technology into a consumer product, is not a practice that by its nature is likely to restrict competition.”

This point goes to Microsoft’s claim that the commission “should have given greater weight to the positive effects of the

Windows operating system design concept,” Smith said. “I’m not suggesting that victory is guaranteed for anyone, but there’s

clearly cause for optimism as we see the litigation path moving forward,” he added.

But Glenn Manishin, an antitrust attorney with Kelley, Drye & Warren, which represented the Computer and Communications Industry Association and The Software and Information industry Association in appealing Microsoft’s antitrust settlement with the United States, said the unbundling ruling was precisely the
result Microsoft wanted to avoid.

“What happened in the CFI’s ruling is that patently absurd arguments, which it managed to persuade the U.S. courts as to

the potential harms to its intellectual property and Windows ecosystem, were rejected as unfounded almost on their face by

the CFI,” he said. “So [the court has] drawn a sharp distinction because the court in Europe actually looked at the evidence

and found it lacking, while courts in the U.S. never examined the evidence and accepted almost all of Microsoft’s arguments

about harm,” he said.

If Microsoft wants to add other new products to its operating system, such as anti-spyware software, or improved Digital

Rights Management systems, “it will be very difficult to draw the line [between] when are you bundling and when are you

responding to demand,” added Brophy, who has represented Apple Computer but none of the companies involved in the EC’s

antitrust case involving Microsoft.

The European Commission on mergers recently asked Microsoft to provide more information regarding its planned stake in

Content Guard, a provider of DRM technology that holds 16 patents and has more applications in process.

As internetnews.com has reported,
ContentGuard’s XrML standard is the basis of the recently approved International Standards Organization (ISO)

MPEG Rights Expression Language , which assigns rights and usage to digital objects, a key feature of DRM.

The EC’s “phase II merger inquiry” signals it has concerns about Microsoft using its dominant position to bundle Content

Guard technology, even though it would be a part-owner in the company with Time Warner and France-based Thomson.

The developments may help explain any extra lobbying amid plenty of chatter over antitrust law in legal circles. After

all, the debate over the CFI’s ruling practically picks up where the European Commission’s rejection of the $42 billion

General Electric/Honeywell merger in 2001 left off.

The decision helped draw distinctions between EU and U.S. antitrust approaches, as David

Evans argued in the Jan./Feb, 2002 issue of Foreign Affairs:

“European antitrust regulation could become an unexpected stumbling block on the road toward a more integrated global

economy. U.S. antitrust authorities presume that markets work; hence government intervenes only when there is clear evidence

that business practices are harming consumers. In contrast, EU competition officials seem to seek the ‘right’ market

structure, sometimes placing the interests of competitors over those of consumers.”

Gordon Haff, technology analyst for research firm Illuminata, said the reality for competitors and open source projects

is that once Microsoft integrates a function in its operating system, it creates a very high bar for anybody that wants to

compete with that function.

On the other hand, competitors pursue the same approaches. “If you look at Solaris for example, that’s pretty integrated,”

Haff said of the proprietary operating system from Sun Microsystems (which helped spur the antitrust case against Microsoft).

“The enterprise open source Linux distributions are pretty well integrated. Is there a lot of choice of what you can

configure [with the distributions]? Yes, but they choose for you, such as which browser to use,” he said.

Integrating components into the operating system creates a streamlined experience, he said. “To the average person using

windows, it’s there, it works, and it’s a very different experience than what’s the case with RealPlayer. But balancing

against that argument, it clearly makes for an uneven playing field for third parties. I don’t think there is a right answer

in some absolute, unbeatable sense about integration and a level playing field.”

Added Manishin: “I think these issues are going to continue until there’s some fundamental shift in technology so that the

PC is not as dominant as it was.”

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