Technology

The EC's New Microsoft Rules


Forget the impact on Redmond; the EC antitrust ruling will be felt most by Intel, Google, and other U.S. companies hoping to expand abroad

Sept. 17 was an unusual day in Luxembourg. The European Court of First Instance was convening in its Grand Chamber for only the third time in its 18-year existence, underscoring the importance of the long-awaited ruling due that day. After a more than three-year review, the Court would release its decision (BusinessWeek.com, 9/17/07) on an earlier European Commission ruling on Microsoft (MSFT). In a landmark decision in 2004, the EC had ordered Microsoft to offer a version of its Windows operating system without a built-in media player and to license key interoperability information to competitors.

As if to presage the decision affirming the earlier antitrust order, when viewers logged on to the Court's media portal they were informed that Real Player—the alleged victim of Microsoft's bundling practices —was the exclusive player supported on the EU site and one would need to install it in order to access the live broadcast of the day's proceedings. Microsoft's world-conquering media player was of no use.

Why More Challenges Are Likely

The implications of the judgment are potentially far-reaching for technology companies with dominant market positions in the EU. Realizing this, lawyers for Microsoft's competitors immediately began arguing that the facts in Microsoft were specific to Microsoft—everyone else was immune. In reality, once the dust settles, the judgment will have repercussions well beyond Microsoft.

There are several obvious reasons to believe that the parade of U.S. technology companies coming under scrutiny in Brussels will continue. First, not surprisingly, Microsoft boosts the Commission's confidence and it certainly won't fear applying the lessons of Microsoft to challenge other significant players. That is apparent from its just announced decision to proceed with an inquiry into Qualcomm's (QCOM) practices and its recent Statement of Objections against Intel (INTC).

Second, the case also liberalizes EU competition law in several important areas. Prior to Microsoft, compulsory licensing of intellectual property rights was seen by the European Court as a very narrow remedy in the EU, to be strictly and rarely applied. The thresholds were high: A dominant company could be required to license its proprietary intellectual property to competitors only where that licensing was necessary to allow the emergence of a new product. With Microsoft, this has effectively changed: it's now apparently enough that a refusal to supply intellectual property prevents "technical development" to leave a dominant company vulnerable to compulsory licensing. This covers a broader range of situations and widens the scope of compulsory licensing in the EU. Moreover, the Court noted that a refusal to license that eliminates "effective" competition, rather than "all" competition, is enough to constitute an abuse of a dominant position. By its ruling, it endorsed the Commission's efforts through compulsory licensing of valuable intellectual property rights to place competitors on "an equal footing."

Further, the Court found that integration of a certain functionality (streaming media player) into a dominant software product (Windows) constituted illegal bundling. In this case, because of the ubiquity of Windows, the court found that competitors were placed at a distinct "competitive disadvantage," even though competing players were readily available for free download over the Internet and could easily be set as the default player by consumers. Consequently, companies that enjoy a distinct leading position in a market now have to assess whether inclusion of new set of features into a dominant platform constitutes illegal bundling. And if it does, they may feel obliged to make a version of the platform available without the new set of features.

Dominant Players Will Need to Adapt

The impact of Microsoft will be felt primarily among companies with dominant technology platforms, such as Google's (GOOG) search engine and IBM's (IBM) mainframe business. For example, IBM was already facing a very detailed antitrust counterclaim to patent infringement charges in the U.S. from a small company called Platform Solutions (PSI), which is seeking to develop and market platforms that would compete with IBM's mainframe computer platforms. The PSI charges directly challenge IBM's efforts to protect its monopoly.

Notably, the Court of First Instance in Microsoft specifically cited as precedent IBM's 1984 written commitments entered into with the Commission following accusations of illegal behavior in mainframe computers similar to those made against Microsoft, explaining that the order on Microsoft was no different. That settlement, since expired, prohibited many of the same practices forming part of the PSI claims.

Every detail of the ruling will be analyzed to determine how it affects the business strategy of such companies. For many companies, the assessment won't be straightforward. Determining, for example, how much interoperability or access information is required to put competitors on an "equal footing," without allowing them to "clone" features of software programs will require not only technical evaluation but an in-depth market-effects analysis. And at what point does incorporating new features into evolving technology become an "abuse" because others may be put at a "competitive disadvantage"?

Ironically, Microsoft itself will probably be less affected by the ruling than other companies at this point. The company has already largely complied with the EC's 2004 decision and has made changes to its business model to accommodate the principles underlying the court's decision. It's the other companies with large operations in Europe that have the biggest cause for concern.


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