Europe Takes Bite Out of Microsoft

Monti's tough ruling on software giant strikes at the heart of the company's grand strategy

4 min read

Illustration: Mike Lane/Cagle Cartoons

Last month, the European Commission in Brussels took bold steps to curb Microsoft's control of the computer software market by slapping the company with tough sanctions aimed at its treasured "bundling" strategy and crafted to influence its future behavior in the market.

In the landmark ruling drafted by Mario Monti, the European Union's competition commissioner, Monti called Microsoft an abusive monopolist and issued a set of far-reaching penalties [see photo, " Decision Time"]. If the decision stands up to appeal, Microsoft will be required to offer a version of its desktop Windows operating system software without the Media Player application built into it. It must also share "interface documentation" so that competitors can more readily design servers to interact with the company's software, and it must pay the European Commission a 497 million fine--roughly US$600 million--the biggest fine ever imposed by EU competition regulators.

While the sum may be peanuts for a company with more than $50 billion in cash, the order to open up its secret code to competitors has no parallel, according to analysts. "Money is irrelevant, and Microsoft could care less about supplying a stripped-down version of Windows as it already does in southeast Asia," says Jaap Favier, vice president of European research at Forrester Research Inc. "But offering an open version of Windows and later Longhorn [the code name for the next version of its operating system], providing the interfaces or doors into functions of these operating systems, and allowing competitors to peek inside--that's where it really hurts Microsoft."

This isn't the first time regulators have breathed down Microsoft's neck. In 1990, the U.S. Federal Trade Commission investigated a long list of allegedly predatory practices, but finally dropped its probe. Eight years later, President Bill Clinton's Justice Department brought a comprehensive suit against Microsoft, arguing that the software company had used its Windows monopoly to control the emerging Web browser market. Justice hired celebrity litigator David Boies to handle the case, who won a celebrated victory in a Washington, D.C., federal district court, which declared Microsoft an abusive monopolist and ordered the company divided. But Microsoft got key parts of that verdict reversed on appeal, and when President George W. Bush's Justice Department declined to challenge that decision, Microsoft escaped with a slap on the wrist.

In Europe, Microsoft can't expect an assist from a business-friendly president, because there is no single president. What's more, the European Commission is rather independent of any direct political influence from the EU's heads of state. It's a powerful executive body that, in many cases, can act as both judge and jury.

This means that Microsoft may not be able to repeat a pattern of conduct of which it stands widely accused: faced with charges of disadvantaging competitors by bundling one product (say, its Internet Explorer software) with its desktop software, the company fights that claim until developments in the market have rendered the issue moot. Meanwhile, it is bundling an emerging product (like Media Player) with its desktop software, once again hurting competitors.

"With its ruling, the commission wants to set a principle for future conduct," says Favier. "Monti is saying, 'I don't want to run behind you any longer; I want to run in front of you.' This is what makes Microsoft very nervous."

Monti, a former economics professor from Milan, Italy, has proven to be a regulator to be reckoned with. Though he has lost some cases on appeal--most recently a penalty his commission tried to impose on Volkswagen for alleged price fixing--his really big decisions have tended to stick. In 2001, notably, he blocked General Electric's bid for Honeywell International Inc. As a result even the mighty Jack Welch had to back down from plans to merge the operations of two globally operating multinationals, just because of the EU's firm opposition.

In the Microsoft proceeding, which dragged on for years, Monti took care at the end to ensure that all the EU nations' antitrust regulators were onboard with him. He stood firm in face-to-face negotiations with Microsoft's formidable CEO, Steven Ballmer, refusing a settlement with the hard-bargaining U.S. executive.

Although Monti's ruling officially and technically applies only to the EU, its impact--like the GE decision--could well be global. Indeed, the EU's finding of market dominance sets a powerful precedent that could help rivals in other parts of the world build cases against the software giant, including the complaint filed with the commission by the Washington, D.C.�based Computer and Communications Industry Association about Microsoft's bundling of products in Windows XP.

Monti's ruling, if upheld, could seriously undermine the U.S. company's strategy of bundling any new applications, not just its Media Player and not just in Europe, into its Windows operating system. Several products in the pipeline could be affected [see box, "What's Ahead in European Microsoft Settlement"].

Microsoft could, for instance, be forced to rethink design plans of a Windows update that would include a Web-search function in the main screen (where search engine Google would love to be). Perhaps even more important, it might have to reconsider plans for Longhorn. That new operating system software is expected to bundle numerous advanced media applications.

The requirement that Microsoft share vital source code with rival software vendors has rattled Microsoft almost as much as the restrictions on bundling. Company lawyer Brad Smith likened it to a newspaper having to share its articles with rivals. He called it "the broadest compulsory licensing of intellectual copyright" in the EU's history.

Ballmer, at a news conference held after the ruling was announced, said "every company should have the ability to improve its products to meet the needs of consumers." The company warned that the ruling would worsen U.S.�European relations, infringe international trade law, and violate its intellectual property.

Certainly, Microsoft has enough money and willpower to fight Monti's ruling before the European Court of First Instance, in Luxembourg, which could stay or cancel the ruling. But what the software giant doesn't need is more drawn-out litigation, especially of the type that may be damaging to the company's reputation, its shareholders' interests, and--perhaps most important--its users. Arguably, what Microsoft needs to do with utmost speed and determination is to focus on correcting, and ideally avoiding� its Windows software's many faults, which have infuriated users worldwide.

"We're constantly having to deal with hot fixes, which consume a lot of time and energy," says Waldemar Mosch, a technical service trainer with the German subsidiary of Creo Inc., which is based in Burnaby, Canada. "Maybe if Microsoft packed fewer features into products and ensured that these work properly, they could avoid a lot of these patches. They should also do more beta testing, especially under real conditions, before they rush out a product that isn't mature."

Some say Microsoft might do better to just separate Windows from the rest of its software business. The result could be better products and fewer regulatory headaches.

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