EU Slaps Microsoft with Record Fines, Sets Stage for More Action

The European Commission’s decision to fine Microsoft Corp. a record $612 million and order the software giant to deliver a version of its Windows operating system minus the Media Player within 90 days, will have little direct impact on consumers or Microsoft rivals.

However, the ruling that Microsoft abused its “near monopoly” does set the stage for the EC to impose more significant and onerous restrictions on future Microsoft software packages. The ruling is yet another blow to already strained United States and European relations. Senate Majority Leader Bill Frist (R-Tennessee), who called the ruling “preposterous,” warned that the EC’s actions against Microsoft could spark a trade war with the United States. And Assistant Attorney General R. Hewitt Pate released a point-by-point rebuttal to the EC ruling. And the rhetoric from Senator Patty Murray (D-Washington) from Microsoft’s home state was even more pointed. Murray released a statement calling the EC decision, “Yet another example of Europe’s consistent harassment of American industries and policies that support our economic growth.”

As part of the ruling, the EC also gave Microsoft 120 days to open up its operating system source code to make it easier for competitors and software developers to write compatible applications and interoperate with Windows. The $612 million fine, the highest the EU has ever imposed, represents just under 2 percent of Microsoft’s worldwide revenue. Under European Union trade laws, Microsoft could have received stiffer penalties totaling up to 10 percent of its annual sales.

Microsoft has 90 days to pay the fine. Under EC law, the $612 million would be divided among EU member nations, but it is unclear if each EU member nation would receive equal shares and/or whether consumers will receive any money through a rebate program.

Any talk of distribution is premature, however. Microsoft immediately said it will appeal the ruling and seek a stay of the EC orders and fine. The appeals process itself could take years.

Market Impact and Analysis
Finding Microsoft guilty for stifling competition in the media player market is a dress rehearsal for the larger and more significant battle to come.

What happens if the EC decision prevails? It will force Microsoft to sell two separate versions of Windows—a stripped-down version minus the Media Player and a bundled version with the Media Player. The EC, in its wisdom, says Microsoft cannot offer any of its PC manufacturer partners, such as Dell Computer, a discount to sell the version of Windows bundled with Windows Media Player.

The EC ruling mandates that Microsoft market two separate products for the same price. Why buy the stripped down version when you could get the bundled version for the same price? If the EC ruling prevails, it will force Microsoft to manufacture untold thousands of copies of Windows, which will languish collecting dust on resellers’ shelves. This benefits no one.

Meanwhile, the EC failed to prove consumers were harmed or that Microsoft’s “near monopoly” had stifled innovation among rivals such as Apple Computer, Real Networks and Sun Microsystems. Yes, the U.S. Justice Department did find that Microsoft was a monopolist that abused its more than 90 percent market share in the Windows desktop OS arena and used it to crush rival Netscape Communications in the browser wars of the mid-1990s. And yes, Microsoft enjoys that same “near monopoly” in the European desktop OS market, although Linux’ popularity is increasing.

But there the similarities end. In the browser situation, Microsoft used its influence to coerce its OEM partners Dell, Compaq (now Hewlett-Packard) and others to strip the Netscape browser software from their PCs. Microsoft has done no such thing in the media player market.

True, Microsoft’s dominance in Windows assures Media Player a near universal audience of PC users. But nothing precludes consumers from using rival media players, including Apple’s QuickTime or Real Networks’ RealPlayer, all of which are available for purchase as a full-featured package or as a free, baseline system downloadable from the Web.

It is also worth noting that Microsoft president Steve Ballmer flew to Europe two weeks ago in a last-ditch attempt to reach a settlement. Among other things, Microsoft offered to bundle three rival media players with Windows and further open the source code to ease interoperability. That didn’t satisfy the EC.

In truth, there was no realistic chance for Microsoft to avoid the EC ruling.

In the larger picture, the EC remains determined to use the media player issue to establish legal precedent to bolster its similar, but separate, action involving Windows XP.

Longer term, the EC could target the next-generation version of Windows code, named “Longhorn,” which will contain extensive embedded Web services functionality, enhanced collaboration functionality and tighter integration between the core Windows operating systems and Microsoft desktop and server applications. It is exactly this type of extensive, bundled support that the EC wants to block.

Bottom Line
The biggest impact is on Microsoft and U.S. trade interests. It's clear from the amount of the fine and the wording of the EC decision that the antitrust body wants to impact the Microsoft’s future business.

Microsoft should do everything in its power to convince consumers, corporate customers, the EC and the U.S. DOJ that it has mended its monopolistic ways. It has made a good start. Federal antitrust judge Colleen Kollar-Kotelly’s recent review of Microsoft gave the software giant good marks for complying with the terms of the Justice Department Consent Decree. Microsoft must now strive to facilitate better interoperability between Windows and competing products.

There is only so much that Microsoft can or should be expected to do in terms of future product development and packaging at the behest of the EC. The EC decision fails to consider the billions of Euros and the thousands of jobs Microsoft brings to its economy.

The EU decision carries more than a tinge of anti-American sentiment, owing to the ongoing geo-political climate and EU feelings regarding the U.S. role in Iraq. This has not gone unnoticed by American lawmakers such as Senators Frist and Murray. The U.S. reaction is, so far, confined to rhetoric. That will change if and when Microsoft’s sales and ability to do business are materially damaged in Europe. With U.S. trade deficits at a record high $489 billion in 2003, the high-technology sector—specifically software—is one of the few areas in which the United States holds a clear advantage.

Europe can point to few resident innovative software giants, with the notable exceptions of Baan, SAP and Siebel. European interests would be better served by following the example set by Japan in the early 1980s. At that time, Japanese chipmakers pooled their collective resources to spur semiconductor chip development. There is nothing stopping the EC from doing the same thing with software.

The Yankee Group originally published this article on 29 March 2004.