Microsoft Should Play Fair in Europe

By Andy Reinhardt and Jay Greene These days, Microsoft's (MSFT) legal strategy is stuck between pragmatism and principle. Redmond's expedient urge, accentuated under General Counsel Brad Smith, is to clear the decks of outstanding legal problems as quickly as possible. Since taking the job in 2002, Smith has settled more than two dozen lawsuits with opponents such as Sun Microsystems (SUNW), Novell (NOVL), and AOL Time Warner (TWX).

Microsoft also scrambled to resolve the European Commission antitrust case in the days leading up to last March's landmark decision, which found that the software giant had abused its monopoly market position. Since that failed effort and the subsequent ruling against Microsoft, which included a $612 million fine, Gates & Co. have made soothing noises about cooperating with European authorities and abiding by the decision's terms.

CRITICAL RULING. Yet, Microsoft can't seem to let go of principle. It's appealing the European ruling to the Luxembourg-based Court of First Instance, arguing that the EC has trampled on Microsoft's intellectual-property rights and freedom to innovate as it sees fit.

That's a defensible stance for any company to take -- after all, Microsoft is looking out for its own interests, and it sees the EC case as a dangerous precedent that could limit room to maneuver in the fast-changing software industry.

But Microsoft appears to be going beyond mere legal tactics in challenging the EC. On Mar. 18, the commission made its unhappiness about such behavior clear and issued a statement saying that Microsoft wasn't living up to the year-old ruling, which required it, in part, to disclose secret specifications for data communication among Windows servers and client PCs.

"BEING CONSTRUCTIVE." In literal terms, Microsoft has complied with the EC's demands. Those specifications are now available to other companies that want to license them. But after consulting with potential licensees, the EC says it has "strong doubts about Microsoft's compliance" with its order, alleging that the company is demanding too high a royalty and making it difficult for potential licensees to gain access to necessary information, such as how to connect to Windows servers.

"We are not trying to rob Microsoft of their intellectual property," says a source close to the EC, "but we have a clear idea of what they should be doing to comply, and they're not doing it."

Microsoft says it wants to work with the EC to resolve the issue. "Microsoft is open to making changes based on the feedback" it gets from the EC, says company spokesman Jim Desler. "Microsoft has an interest in being constructive in the process."

To sellers of the open-source Linux operating system, though, there's nothing constructive about the giant's tactics. After Microsoft's settlements with Sun and Novell, Linux OS sellers are the only ones left with a vested interest in getting the specs they need for programs to communicate with Microsoft servers (see BW, 5/31/04, "Teaching Microsoft To Make Nice?").

FRUSTRATED HOPES. Yet the open-source philosophy hangs on a strict doctrine requiring all software code to be freely distributed. If a Linux company buys a license to Windows server protocols, those in the open-source community believe they can't use the feature and still comply with the rules of the road.

It's a contention that Microsoft disputes. But the anguish among Linux partisans is palpable. "We don't want Windows code," says Carlo Piana, chief counsel for the Free Software Foundation/Europe, a group backing open source. "We just want to be able to talk to it."

That frustration has made its way back to the EC, which has now gone public with its reservations about Microsoft's behavior. The EC's original order was careful not to strip Microsoft of its intellectual-property rights. For instance, the company wasn't required to disclose actual source code and was allowed to obtain "reasonable remuneration" for disclosing secret interface information. Yet Microsoft appears to be living up only to the letter, not the spirit, of the law.

THE REAL LOSERS. In effect, Redmond was ordered to act like a good corporate citizen -- to share information that would let all the servers on a network, whether running Windows or another operating system, communicate on equal terms. In the interests of customers, that ought to be a goal for the software giant to embrace. Instead, it's trying to maintain a proprietary advantage, at the expense of the broader computing industry.

With its vast research and development resources and unrivaled distribution channel, Microsoft ought to be able to compete and win on the merits. If it offers a better solution, customers would be correct to choose its products vs. those offered by competitors. Instead, it's using a "lock-in" tactic to keep competition at bay.

The EC ruling should have been a wake-up call to Microsoft: Assume and accept your position as a monopoly supplier, and act accordingly, with responsibility and grace. Instead, Microsoft is acting petty. The potential losers are customers, who'll have less choice. There's nothing pragmatic or principled about that. Reinhardt is a Paris correspondent for BusinessWeek, and Greene is Seattle bureau chief

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