The ties that bind

The European Commission’s decision against Microsoft is likely to be a watershed for competition law enforcement in the EU. Robert Bell reports

The lasting legacy of the Microsoft decision, if it is upheld on appeal, will be its impact on the policies and practices of other high-tech companies. How exposed will they be to future regulatory challenges, or to costly litigation for the same or similar behaviour?

The decision has also caused a pronounced shift in the regulatory landscape. In its wake, a more proactive and interventionist stance towards the high-tech sector by the European Commission and national competition regulators is inevitable.

This article reviews the effects of the Microsoft decision on high-tech companies and considers the likely future stance of the regulators.

The decision

On 24 March 2003, the Commission levied a €497m (£336m) record fine on Microsoft Corporation for abusing its dominant market position by deliberately restricting the interoperability of Windows PCs and servers with competitors’ server products, after refusing to disclose interface information. Microsoft was also condemned for tying its Windows Media Player (WMP) with the company’s Windows 2000 PC operating system. This conduct had the effect of foreclosing the market to competitors and ultimately reducing consumer choice and driving up prices.

Remedies from the European Commission

To restore the conditions of competition, the Commission ordered that Microsoft should disclose complete and accurate interface information that will allow non-Microsoft workgroup servers to achieve full interoperability with Windows PCs and servers, and to keep this interface information up to date. Microsoft was also told to end its unlawful tying practices by offering PC manufacturers a version of its Windows client PC operating system without WMP. The company can still offer its Windows client PC operating system with WMP, so long as it makes the untied product available aswell.

The effects of the decision

The decision is likely to have important and wide-ranging commercial and legal implications for the computer sector, for Microsoft itself and for competition law enforcement in general in the European Community (EC).

Microsoft’s operating systems equip more than 95 per cent of the world’s personal computers. As virtual monopolist, its anticompetitive policies have a pronounced effect, not only on corporate IT networks but for the whole of society. The Commission felt it had to act to ensure free and fair competition, and to lay down principles against which broadly similar cases would be judged.
Microsoft is already the subject of further complaints that the Commission is investigating. One pending complaint deals with the entire Windows XP operating system and the bundling of programs such as Instant Messenger, Outlook Express and Movie Player onto it.

Legally binding precedent

Regulators argue that the EC has long needed a strong, legally binding precedent applying the provisions of Article 82 of the EC Treaty to the computer sector. The Microsoft case is the first in EC competition law where a major computer company has been fined and condemned for anticompetitive behaviour.

It has been a long time coming. The Commission has been seeking such a precedent for more than 20 years, but previous cases against IBM in the 1980s and Digital in the 1990s were settled by way of undertakings without prejudice to the rights of the parties. Armed with the Microsoft precedent, the Commission and national competition authorities are going to be more receptive to considering these types of anticompetitive and exclusionary conduct, either as a result of complaints or through adopting a more proactive approach with ‘own-initiative investigations’.

Microsoft business model condemned

The €497m (£337.7m) fine is unlikely to give the software giant too much of a headache. More significant is the effect it will have on its business model. The decision will open up Microsoft to effective competition in the server product and media player markets. The key cause of this adverse ruling is Microsoft’s business model of leveraging its virtual monopoly in PC operating systems by tying in peripheral functionality or products to the exclusion of third-party competitive offerings. Without the Commission’s intervention, Microsoft would have extended its dominance into many related markets. WMP was just the tip of the iceberg.

The Commission also feared for related markets in the digital media sector, such as encoding technology, software for broadcasting music on the internet and digital rights management. The decision halts Microsoft in its tracks and provides a salutory lesson for other high-tech companies seeking to emulate a similar strategy.

Licensing of interface information

One issue in the decision was Microsoft’s refusal to supply interface protocols and to allow their use for the development of interoperable products. Microsoft had previously supplied interface information in relation to Windows NT, but had discontinued the practice with the development of Windows 2000. The Commission relied on the previous evidence of supply to characterise Microsoft’s refusal as a refusal to supply under Commercial Solvents and Others v Commission (1974).

The Commission also held that interface information must be disclosed even if it attracts copyright protection relying on the Magill case (1995). Justifying its stance, the Commission cited Microsoft’s overwhelming dominance, the indispensability of the interface information and the risk of eliminating competition in the market.
This was one of the very few instances under EU competition law that a compulsory IP licence has been ordered. The European Court’s judgment in the IMS case, delivered on 29 April 2004 (post-Microsoft), also considered issues associated with compulsory licensing. It substantially reaffirmed Magill and will no doubt add support to the Commission’s case on appeal.

Tying in a technology context

There has been a long line of legally binding decisions on tying. None has dealt substantially with the concept of products unlawfully tying in a technology context. Is, for example, a software product that has
multifunctionality a single, integrated product, or many?

The Microsoft decision addresses this issue head-on. Recital 803 of the decision concludes: “For tying to be proved under Article 82, the distinctiveness of the products in question (Windows Operating System and WMP) has to be assessed by reference to consumer demand. If there was no independent demand for an allegedly ‘tied’ product, then the products at issue are not distinct and a tying charge will be to no avail.”

The Commission concluded that WMP was a separate, distinct product, referring to the number of vendors that specifically sold separate media players. Through this case, the Commission has set down guidelines by which all future technology bundling cases will be judged.

Effects on technology companies

The Microsoft decision is a defining moment in EU competition law enforcement and will be used as a strong legal precedent to attack companies that refuse to provide interface information and/or resort to unlawful tying practices.

The ruling gives the Commission the green light to enforce more vigorously the EC’s commitment to the development of open systems in the Software Directive. It also poses difficult questions for the future and the extent of the bundling practice.

Every software company, electronic publisher and service provider will need to review their policies in the light of this decision, and it is just as relevant to specialist small and medium-sized technology companies as it is to the giants of the computer sector.

There is no doubt that challenges to these types of anticompetitive and exclusionary conduct are likely to increase substantially.

Robert Bell is a competition partner at Nabarro Nathanson