The EU Slaps Microsoft

A blow to Microsoft usually garners a wide round of applause. However, the upholding of an earlier antitrust verdict against Microsoft by the European Union’s (EU) second-highest court, handed out on September 17, has instead raised questions and skepticism. Many feel the premise that such legal action was called for in order to encourage competition and innovation is false and that the decision will embolden the court to go after other technology companies. Though it has denied its actions against Microsoft are an attempt to regulate the industry as a whole, the EU Competition Commission has already opened up another case against a market leader, Qualcomm. The names of other market leaders, such as Google and Apple, have also surfaced as possible next-in-lines.One organization speaking clearly on behalf of Microsoft is the Association for Competitive Technology (ACT), “an international grassroots advocacy and education organization representing more than 3000 small and mid-size information technology firms from around the world.” ACT expresses the view that the landscape of the PC has significantly changed since Microsoft first faced legal action in 1998 and that the innovation the EU commission seeks to stir up has already happened despite Microsoft’s legally unchecked presence.

ACT points out that PCs and laptops, in contrast to the era in which the Microsoft debacle began, are now shrinking due to the move of many applications to online delivery. (Most recently this includes IBM and Adobe which are offering online counterparts to MS Office, and even Microsoft which is taking large strides towards offering online versions of its Office products.) This switch, they argue, is lessening the importance of the desktop and the operating system. Also, Linux and other open source options have been growing for the last decade according to ACT. Interest in such products is evident given that IBM’s online Office rival was downloaded one hundred thousands times in the first week alone, and that Dell, Gateway, and Sony are offering Linux-based PCs. Finally, ACT notes that “Apple now ships one of every six laptop computers in the U.S., moving up to a third-place tie with Gateway.”

In arguing that the ruling is in support of big business and not consumers ACT suggests many small and medium sized enterprises (SME) will actually be hurt by the it. These SMEs depend on innovations from Microsoft ACT argues. “A large platform such as Windows creates a kind of ecosystem for thousands of developers. While a few of these developers view Microsoft as a competitor, the vast majority view the company as an important supplier to their business. While adding to that ecosystem can be bad for a few companies, the benefits outweigh the costs far more often and consumers are the beneficiaries.” According to ACT, many SMEs would also be hurt due to the requirement they reveal their intellectual property on demand. The organization questions whether Google, hardly even in its infancy a decade ago, and Skype would have managed to innovate had they had to turn over relevant intellectual property? Both companies, ACT notes, have managed to find a niche and achieve large market share even in the shadow of Microsoft. But it is not just organizations of indiscernible allegiance such as ACT, which are questioning the stance of the court.

In a somewhat ironic twist, the U.S. Department of Justice, which settled with Microsoft years ago, has vocalized dissent. After the verdict was delivered, Thomas Barnett, assistant attorney general at the U.S. Department of Justice’s Antitrust Division, commented that the ruling, “rather than helping consumers, may have the unfortunate consequence of harming consumers by chilling innovation and discouraging competition.” Needless to say the EU courts did not take kindly to the comments. European Competition Commissioner Neelie Kroes stated that, “When we observe a situation where one producer has a share of 95 percent of the market, it’s a monopoly. It’s not just a monopoly-like situation,” and that, “A significant drop in market share is what we would like to see.” Jonathan Zuck, president of ACT, seems to think this mentality is harmful. “What the court is basically saying is that if you develop a successful product and get too big, the European Commission is going to force you to give away your intellectual property,” he said. Others agree and suggest the court may begin to go after other technology companies with large market share or which allow limited access to intellectual property.

The headline The New York Times ran after the verdict makes its point clear, “Microsoft Ruling May Bode Ill for Other Companies.” That article states, “Software and legal experts said the European ruling might signal problems for companies like Apple, Intel and Qualcomm, whose market dominance in online music downloads, computer chips and mobile phone technology is also being scrutinized by the European Commission.” The Times quotes David B. Yoffie, a professor at the Harvard Business School, “If you end up handicapping a major player in new markets, you may actually not enhance competition but hinder it, and help create new monopolies.” As example Mr. Yoffie uses Google in Internet search and Apple in digital music. The Times, and those it chooses to quote, are not the only ones floating these names. Blogging for ZDNet Dan Farber & Larry Dignan ask, “Now that the EU has given the concept of interoperability priority why wouldn’t a broader battle with Apple be opened?” They point out Apple’s large iTunes market share, that it does not share its DRM protocols with others, and its prior regulatory run-ins with regulators in France. As for Google, “Interoperability may not be an issue, but market share could be . . . When Google closes its DoubleClick deal don’t be surprised if the EU whips something up.” ComputerWorld states much the same, “With Microsoft Corp.’s antitrust appeal now decided, the next U.S. technology company to get a place on the European Union (EU)’s regulatory hot seat may be Apple, an antitrust expert said.” The expert referred to is Herbert Hovenkamp, a professor at the University of Iowa College of Law who also holds that the commission, “now has a license to go ahead, and they have a pretty aggressive posture. I think this bodes ill for some companies.”

It is interesting to note that just two weeks after the verdict was delivered formal antitrust proceedings have been opened against Qualcomm. The commission is investigating the San Diego-based chip maker for possible abuse of their dominant market position. Reuters reports that the move had been anticipated but that, “European Commission spokesman Jonathan Todd said there was no link between the cases.” However, Reuters does acknowledge the proximity in time to the Microsoft verdict.

“I will not look for fights, but where interventions will make consumers better off, I will not shy away from them,” stated Comissioner Kroes in a commentary run in the Wall Street Journal. Microsoft is also not one to shy away from a fight, indeed it was their stubborn refusal to back down to the EU’s initial requests that led to the current situation. But while much of the talk is about the impact on the future of technology companies and technology in general there has been less print given to the impact on Microsoft. Shifting attention in that direction gives some interesting perspective.

The fine is a bit more than a drop in the bucket for the Microsoft machine, but not much. And it is likely that they will make what little rebound is necessary from the decision. According to the Economist, “Microsoft’s pride may have been hurt by the court, but its dominance is hardly under immediate threat.” For Microsoft, more important than planning a comeback against the court is planning how to survive in the current and rapidly evolving arena. Facing the growth of applications delivered online, the rise of Linux and open source options, and even a little pressure from Apple is more of a foe than the EU. As the Times notes, “The real challenge to Microsoft, after more than a decade of dominating the technology industry, is coming not from the government, but from the marketplace.”

A more complete version of this post, including links to market research, can be found at the website of Analyst Views Weekly.

More information on this topic can be found in Northern Light’s Software, Computers, & Services Market Intelligence Center.

And in the following articles:

EU Opens Antitrust Proceedings vs Qualcomm
Reuters, October 1, 2007
The European Commission has launched antitrust proceedings against U.S. chip maker Qualcomm after mobile phone manufacturers complained it charged far too much for vital technology licenses. Nokia, Broadcom Corp., NEC Corp., Texas Instruments Inc., Matsushita Electric Industrial Co Ltd and Ericsson complained in 2005 that Qualcomm’s license fees for its third-generation technology were far too high.

EU’s Kroes Calls U.S. Govt Reaction to Microsoft Ruling ‘Unacceptable’
Forbes, September 19, 2007
EU competition commissioner Neelie Kroes said the criticism by the head of the US justice department’s antitrust division of the EU court ruling against the US software giant Microsoft Corp was ‘totally unacceptable’. In a strongly-worded response, Kroes, speaking to reporters here, said: ‘It is totally unacceptable that a representative of the US administration criticises an independent court of law.’

Microsoft Ruling May Bode Ill for Other Companies
New York Times, September 18, 2007
Europe’s second-highest court delivered a stinging rebuke to Microsoft Monday, but the impact of the decision upholding an earlier antitrust ruling may extend well beyond the world’s largest software maker to other high-technology companies. Software and legal experts said the European ruling might signal problems for companies like Apple, Intel and Qualcomm, whose market dominance in online music downloads, computer chips and mobile phone technology is also being scrutinized by the European Commission.

Microsoft’s EU Loss May Set Precedent for Intel, Apple, Others
InformationWeek, September 17, 2007
Though Microsoft lost an appeal on European Commission antitrust claims Monday, the approximately $1 billion fine for which Microsoft remains liable doesn’t close the issue, either for Microsoft or the rest of the technology industry. The outcome of the case could influence the very nature of competition among the dominant players in the technology industry, forcing players like Intel, Apple, and others to share or open their technology to outsiders or refrain from certain competitive practices.

Microsoft’s Big European Defeat: What Now?
BusinessWeek Online, September 17, 2007
The Sept. 17 ruling by Europe’s second-highest court affirming a landmark 2004 antitrust order against Microsoft is no mere bump in the road for the software giant. None other than Brad Smith, Microsoft’s chief counsel, put the decision into the sweeping context it merits. The case, he said, will have an “extraordinary impact” that will occupy “the thoughts and discussions of many people, not just in the weeks ahead, but in the months and years to follow.” The company hasn’t yet decided whether to appeal.

Microsoft Loses Appeal against EU Antitrust Order
Bloomberg, September 17, 2007
Microsoft Corp. lost its appeal of a European Union antitrust ruling, forcing the world’s biggest software maker to pay a record 497 million-euro ($689 million) fine and help rivals connect their products to the Windows operating system. The European Court of First Instance in Luxembourg today backed the EU’s 2004 decision that ordered the U.S. company to disclose proprietary data and strip music and video software from a version of Windows. The judgment can be appealed to the European Court of Justice, the EU’s highest court.

Key Dates in EU Antitrust Action
International Herald Tribune, September 17, 2007
This article presents a timeline of key dates in the European Union’s antitrust proceedings against Microsoft Corp.

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