Monti to Microsoft: Guilty as charged

Update: Mario Monti issued his ruling against Microsoft today, fining the company €497m and instructing it to change the way it does business in Europe

Today, Mario Monti, the European Competition Commissioner, issued his ruling in the long-running case against Microsoft, fining the American software giant $613.4m (€497m), the heaviest punishment in any European competition case to date.

Monti ruled that Microsoft had failed to provide information to rivals which they needed to compete fairly in the market for server software. He also ruled that the company has been offering Windows on the condition that it came bundled with the Windows Media Player, and so was stifling competition in the market for media player software. Microsoft must refrain from using any commercial, technological or contractual terms that would have the effect of "rendering the unbundled version of Windows less attractive... In particular, it must not give PC manufacturers a discount conditional on their buying Windows together with the Windows Media player."

"Dominant companies have a special responsibility to ensure that the way they do business doesn't prevent competition on the merits and does not harm consumers and innovation," said Monti.

"Today's decision restores the conditions for fair competition in the markets concerned and establishes clear principles for the future conduct of a company with such a strong, dominant position," he added.

In a statement, Microsoft CEO Steve Ballmer said, "We worked hard to reach an agreement that would address the European Commission's concerns and still allow us to innovate and improve our products for consumers. We respect the Commission's authority, but we believe that our settlement offer from last week would have offered far more choice and benefits to consumers."

Monti said that the company now has 120 days to provide the information that rival server makers need to compete fairly, and that it must continue to update this information in the future. It also has 90 days to provide a version of Windows without the Microsoft Media Player, although it can also continue to provide a version that includes the Media Player.

Microsoft has said it will appeal the decision at the Court of the First Instance in Luxembourg, in a process which most commentators expect could last up to five years.

Setting a precedent
Some observers welcomed the ruling, saying it would provide clarity in a complex market.

"We are very pleased to see a decision in this case. We haven't had a major decision in this sector since the IBM case, and even that wasn't a decision -- it was settled. Absent this decision, there was no guiding principle relating to this sector, so we're definitely better off," said Michael Reynolds, head of the antitrust group at Allen & Overy in London.

"One benefit of the case going to court is that we will get a lot more information, so both Microsoft and others will know what sorts of activities are illegal in Europe," said Nic Francis, a consultant with Europe Economics, a London-based consultancy.

Some observers also expressed surprise at the severity of the fine in a case which turns on some quite tricky legal arguments.

"This is not a classic parallel trade infringement or cartel case: it's unusual. On the server issue, there's compulsory licensing to a competitor of intellectual property. Generally these cases are border line. On the media player, it's a really novel bundling issue, and that is one of the more unresolved areas of law. So suddenly there's a €497m fine for something that no one really knew was illegal?" said Marc Hansen, an attorney with Latham & Watkins in Brussels.

Competition lawyer Hans-Jurgen Meyer-Lindemann, of Shearman & Sterling in Brussels, points out that the fine is far greater than in any previous market dominance case. "The highest fine so far was for Roche in a vitamin cartel case. In a case with market dominance the highest fine was only €75m. It's Microsoft. I think Monti wanted to leave a clear message," said Meyer-Lindemann.

Dominance cases are generally considered more complex than cartel cases, said Francis of Economics Europe.

"It's a much finer line in abuse of dominance cases than when you're dealing with a cartel. Behaviour can be good or bad depending on circumstances. So having a fine like this is remarkable," he said.

Is it because I'm American?
There may also be whiff of anti-Americanism in the draconian fine of a US company by a European regulator at a time of heightened political sensitivities. "It's not a pleasant time to be a large, dominant, US-based company," said one legal observer. In a press conference today, Monti denied that the case had anything to do with anti-American feeling. “The fact that a company is multinational is something we could not care less about, and we should not care less about. We should not take it down to the nationality of the company. We are here to protect the interests of consumers,”he said.

Both Microsoft and the Commission have so far gone out of their way to try to keep relations civil during the case. However, the gloves may now be off. A legal source working for Microsoft on the case heaped scorn upon the decision.

No more Mr Nice Guy
"It all boils down to a question of vanity on the part of Monti. He caused Ballmer to come at the eleventh hour, and he resisted a deal. The thrill of imposed the highest fine ever was something that he couldn't resist. That job tends to attract people with a chip on their shoulder," said the source.

He expressed amazement at the decision's remedies, pointing out that many people use multiple media players, and arguing that the inclusion of Microsoft's software did not prohibit consumers from downloading rival players. He also said that Microsoft had bent over backwards to address this issue in its proposed settlement, by offering to include rival media player software with its own on Windows, as well as including a CD or DVD containing other vendor's software.

"The remedy is ridiculous and it's based on the notion that you can only have one media player," said the source. "My son has six media players."

On the server issue, the source pooh-poohed the whole question of interoperability problems between Microsoft's software and the client software of its rivals.

"Server interoperability: is there a problem? All companies, especially the large ones, live in a very heterogeneous environment and all those products must work together," said the source.

He said that in its settlement proposal, Microsoft had made the technically ambitious offer to produce communications protocols which would cover "all possible situations".

"This is not an easy question: you have intellectually property rights, and the commission is trying to order compulsory licensing, and this is hard to order under EC and World Trade Organization law. A settlement in which they would voluntarily comply would have been better than a legal battle," said the source

The next legal step that Microsoft is likely to take is to apply for an annulment of the decision, which is a relatively long procedure that may take several years, involving two written submissions from Microsoft, two from the Commission, as well as other submissions for competitors and supporters of Microsoft. This lengthy process would end with an oral hearing and a judgement.

Microsoft can also apply for interim measures, effectively requesting suspension of the measure on the grounds that it will cause irreparable damage. This process would take a few weeks.

"You can file for both an annulment and then interim measures, so Microsoft will file for an annulment in the next two months and ten days, say by mid-June, and then will also be applying for interim measures, which takes a couple of weeks," said the source.

Choosing an independent trustee
The Commission will appoint an independent trustee to monitor compliance with its ruling. This will "oversee that Microsoft's interface disclosures are complete and accurate, and that the two versions of Windows are equivalent in terms of performance." Monti said during today's press conference that Microsoft would submit a list of names to the Commission from which the Commission could choose a trustee, describing this as a "standard procedure" in competition cases.

The Commissioner's ruling on the specific question of the Windows Media player and Microsoft's server software business raises the larger issue of future competition clashes with the Commission. The legal issue here is whether it is possible to frame a ruling that will seem fair to Microsoft, and address the Commission's concern that the company will not break competition rules in the future.

The Commission said in its statement that it "believes the remedies will bring the antitrust violations to an end, that they are proportionate, and that they establish clear principles for the future conduct of the company."

"Microsoft was not going to bind itself to a rule which nobody could really articulate. This could not lead anywhere," said the Microsoft legal source.

A good day for Sun
A spokesperson for Sun Microsystems welcomed the decision, a legal victory for the Microsoft rival which had initiated the initial Commission enquiry. Sun complained that Microsoft had refused to provide interface information necessary for Sun to be able to develop products that could interface with Windows PCs, and so was unable to compete on an equal footing in the market for work group servers.

"The Commission found that Microsoft has not been competing on the merits, but instead used interoperability between its desktops and servers to override other factors of server performance offered by its competitors," said Lee Patch, vice president of legal affairs at Sun.

"The Commission’s decision seeks to create a level playing field in the work group server market place, enabling competitors to deliver work group servers that can fully interoperate and therefore compete on the merits. For the first time in many years, IT managers will be able to choose from a variety of work group servers, confident that they will interoperate with Microsoft desktops," said Patch.