Global Economics

Microsoft in Europe: The Real Stakes


Nothing less than the future of government regulation in the tech industry is riding on a key antitrust ruling in Europe

Microsoft's legal battle with Europe's competition regulator will reach a climax on Sept. 17, when Europe's second-highest court, the Luxembourg-based Court of First Instance, hands down a judgment that could determine the future of antitrust policy in the technology sector, as well as the commercial and legal strategy of the U.S software behemoth.

The immediate issue before the court is whether to uphold the European Commission's landmark 2004 antitrust decision against Microsoft (MSFT) or to side with Microsoft in its appeal. But the stakes are much higher than just one case. If the Luxembourg court validates the Commission's order, Microsoft could face a future in which its product design decisions and licensing policies are subject to scrutiny by governments around the world. If the court sides with Microsoft, it could signal the death knell for any serious attempt by policymakers anywhere to rein in the software giant.

The issue is of vital importance in Europe and beyond. Even as both sides have waited for a ruling from the appeals court, a group representing Microsoft rivals, including IBM (IBM), Oracle (ORCL), and Nokia (NOK), filed yet another complaint against Microsoft with the Commission last year. They argue that with the new Vista version of Windows and Office 2007, Microsoft is trying to extend its dominance into even more areas of the market—and threatening the open nature of the Internet.

If the court overturns the Commission's 2004 decision, it would eviscerate Europe's antitrust effort—and likely stop movement on the new complaint. But if the justices affirm that Microsoft employed unlawful business tactics in the past, "the Commission will be empowered to prohibit their use in the future," says Thomas Vinje, a partner at the law firm Clifford Chance in Brussels who represents a coalition of tech companies behind the latest complaint. Microsoft almost certainly will press on, even if it loses: The company is expected to appeal a negative ruling to the European Court of Justice, the highest body in the bloc and final arbiter.

Moment of Truth

Microsoft has been in the crosshairs of European antitrust officials since 1998. In March, 2004, the EU's Competition Directorate, under the leadership of Mario Monti, ordered the company to offer a version of Windows without a built-in, or "bundled," digital Media Player. Microsoft also had to share proprietary technical information to help rival software products communicate better with Windows desktops and servers. And the EC ordered the company to pay a $613 million fine, imposing an additional $390 million penalty in July, 2006, for Microsoft's failure to comply with the technical disclosure remedy.

Microsoft appealed, and now, at last, the moment of truth has arrived. Legal experts familiar with the Microsoft case—as well as with the Court of First Instance and Europe's skimpy collection of antitrust precedents—are deeply divided on the likely outcome. Some predict a split decision, with Microsoft winning on the media player (bundling) component of the case but losing on the interoperability (disclosure) part. One way or another, the Sept. 17 ruling will determine how effectively the European Commission can go forward with legal challenges to companies such as Microsoft and Intel (INTC).

That's critical because even while waiting for the appeal ruling, the Commission has launched an antitrust investigation against Intel (BusinessWeek.com, 7/27/07). On July 27, it issued a "statement of objections" that alleges Intel broke European Union law with the aim of excluding its main rival, AMD (AMD), from the market for the widely used x86 computer chip.

Slow-Moving Regulators

In recent years, the European Union increasingly has taken on the role of global regulator for the tech industry, filling the vacuum left behind as the U.S. Justice Dept., under the Bush Administration, took a much less active role in pursuing antitrust cases. The EU push continues under Competition Commissioner Neelie Kroes, who replaced Monti in 2004. Analysts say the outcome of this case will determine if the Commission's Competition Directorate has the legal toolkit to enforce antitrust law in the complex and fast-changing technology business.

Indeed, many observers complain that regulators and courts are far too slow ever to be effective at shaping tech competition. During the years Microsoft has squared off with the EU, its market share in server operating software has grown to more than 70%, while Windows still holds a 93% share of desktop operating systems and Microsoft Office commands a 97% share of personal productivity applications.

That's why rivals are prodding the EC to go after Microsoft again. They argue that Vista and Office 2007 demonstrate a longstanding strategy by Microsoft to eliminate alternative platforms that threaten its market control. "Microsoft continues to protect and extend its monopolies through bundling and selective denial of interoperability information," says attorney Vinje, who represents the group of tech companies going after the software giant in the latest protest. Besides IBM, Oracle, and Nokia, the coalition, which filed its complaint as the European Committee for Interoperable Systems, or ECIS, includes Sun Microsystems (JAVA), Adobe Systems (ADBE), RealNetworks (RNWK), and open-source software maker Red Hat (RHT).

Antitrust Decision's Weaknesses

The ECIS argues that the European Commission should take action to restore competition in the server market and preserve the open-source operating system Linux and the Internet as alternative computing platforms. If it doesn't, the risk is that much of the world will be locked into using Microsoft software for the next 10 years, says Carlo Piana, a partner at Milan law firm Tamos Piana & Partners who represents the Free Software Foundation Europe, an industry group that champions open-source software.

Brussels antitrust lawyers say it is possible the new complaint will go forward even if the Commission loses on several counts on Sept. 17. The EC's 2004 decision does have some potential weaknesses, say antitrust lawyers. The remedy to fix Microsoft's Media Player monopoly failed miserably, for instance: The EC forced Microsoft to sell a version of its Windows operating system without Media Player software bundled in—but only a few thousand copies of the stripped-down version were ever sold. And RealNetworks, despite the ruling, became irrelevant in the media player market.

Another problem is Microsoft has negotiated private settlements with five of the major rivals who supported the original European case: Time Warner (TWX), Sun Microsystems, Novell (NOVL), the Computer & Communications Industry Assn., and RealNetworks. That means all the evidence submitted by companies such as RealNetworks was stripped from the record before being submitted to the Court of First Instance.

Appeal Possible from Either Side

The court could, in fact, rule against the Commission on procedure, fact, or remedy. What is essential for the Commission is that the legal grounds for its decision are upheld. Without that, it may lack the legal precedent—and gumption—to proceed with new cases.

Microsoft is hoping for victory, of course, though it couches its ambitions in diplomatic language. "This isn't really a question of win or lose," says spokesman Tom Brookes. "Microsoft hopes it will get clarity on some of the big questions regarding what its responsibilities are, and hopes that will form a basis for a constructive conversation with the regulators and with the industry so we can all move forward."

Either side has two months and 10 days to appeal the judgment of the Court of First Instance to the European Court of Justice. If that happens, it is likely to take at least another 18 months for a final decision to be reached.


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