MS faces tougher battle in Europe

Last week's appeals court ruling lifted from Microsoft the immediate threat of a breakup. But, in the coming months, Microsoft will face a tough battle in Europe, experts said. Two cases are pending there, relating to allegations Microsoft's desktop operating systems gave the company unfair advantage in the server market.

The EU's decision to block the proposed US$43 billion merger of General Electric and Honeywell on Tuesday due to antitrust concerns is a sign of renewed vigor on the part of regulators, said Peter Alexiadis, an antitrust attorney with Squire, Sanders and Dempsey in Brussels.

"This is generally a time when the Europeans will flex their antitrust muscle," said Alexiadis. "A lot of it is certain paranoia that the onset of the Bush administration essentially means the death of effective antitrust enforcement. There seems to be an unspoken desire to ratchet up the enforcement on this side of the Atlantic to prove that effective antitrust enforcement isn't dead."

Emmett Stanton, an antitrust attorney with Fenwick & West in Palo Alto, Calif, agreed that more aggressive enforcement would be likely in Europe. "There is a fair amount of buzz that the European competition authorities are going to be the next big arena for lots of issues, more in the mergers arena, but certainly (for) Microsoft," he said.

The European Commission took three aggressive antitrust actions on Tuesday: Blocking the merger of General Electric and Honeywell that was approved in the United States; in Germany, taking interim measures against IMS Health, which holds a monopoly in pharmaceutical information; and launching a detailed investigation into the merger of two Brazilian ore companies.

European Commission spokeswoman Amelia Torres on Tuesday denied that the actions signal more aggressive enforcement or have any impact on the Microsoft investigation. "I would not necessarily draw that conclusion," she said.

But Glenn Manishin, an antitrust attorney with Patton Boggs in McLean, Va, said actions across the Atlantic show a new eagerness to enforce antitrust laws. "The resurgence of EU antitrust is going to be a growing significant factor in antitrust policy in the future," he said.

A harder line from European trustbusters comes at a bad time for Microsoft. While the US Court of Appeals for the District of Columbia Circuit vacated a federal judge's breakup order, the core of the case against Microsoft remains intact. Unless the two sides engage in settlement talks, a new judge will be randomly assigned before part of the case is re-litigated and a new remedy decided.

Some analysts are concerned last week's decision could influence the direction of the European investigations.

"Our sources are concerned that the EU may perceive the appeals court ruling as an opportunity to adopt a 'heavy handed' approach against Microsoft," Solomon Smith Barney analyst Richard Gardner wrote in a Tuesday research report.

Merrill Lynch analyst Henry Blodget raised similar concerns in a Monday research note. "Some legal experts believe that the appeals court ruling will have a ripple effect overseas, leading to increased activity in a region where Microsoft lacks the political clout that it has in the US."

European Competition Commissioner Mario Monti on Tuesday said the investigations there were not linked to the US case, Reuters reported.

"Nevertheless, there are of course certain common features with regard to the industry that is being considered, and in this respect my services (staff) are examining the Court of Appeals' judgment with interest," Monti told Reuters.

The European Commission has two Microsoft investigations in progress, brought on by complaints made by Sun Microsystems, Torres said. While there was talk of consolidating the cases, the European Commission has yet to do so. "On Microsoft we have nothing to say," she said about the investigations.

Microsoft spokesman Jim Cullinan emphasized the Redmond, Wash-based company was cooperating in both investigations.

"We continue to work with the commission, to respond to their questions, to provide them the information they need on Microsoft's commitment to interoperability," he said. "Microsoft is very focused on ensuring that other companies' products can interoperate seamlessly with Windows, because that's in the best interest of European customers."

Microsoft is being investigated for violating Article 82 of the European Community Treaty, which governs the abuse of dominant position. While US trustbusters focused on Microsoft' Windows 95 and Windows 98 desktop operating systems, the European Commission is more concerned with the server market.

Of the cases, the European ones are potentially the most damaging to Microsoft, particularly as it moves ahead with its server driven .Net software as a service strategy, said Ken Wasch, president of the Software & Industry Information Association (SIIA).

"The European Commission's investigation is a very thorough one," he said. "It's being taken very seriously by Microsoft. We think the European Commission will reach the right conclusion eventually: that there's a problem that really needs to be addressed."

Microsoft's biggest challenge has to do with how different trustbusters on both sides of the Atlantic approach competition. US antitrust law tends to focus on benefit or harm to consumers. While a monopolist's business practices might harm competitors, that action could be deemed lawful as long as there is no negative effect on consumers.

"The competition rules here tend to protect competitors as much as they do customers," Alexiadis said. "The EU's focus is much more about foreclosure," or whether companies cut off markets from competitors.

This could hurt Microsoft as it continues to integrate new features into Windows XP, such as Passport authentication, and extend its dominance into new areas, such as software services. Those areas could also be affected by last week's ruling in the US, as well. Any area where Microsoft could be perceived as crowding-out competitors would be fair game for European trustbusters, say analysts.

Alexiadis described European antitrust as "more paternalistic. It's our duty to look into the future. For a lot of these industries, there's no turning back (the clock). The US response would be that's especially not true in high tech, where innovation can be explosive. Today's monopolist is tomorrow's has been."

Another problem facing Microsoft is the freedom European trustbusters have pursuing cases versus their US counterparts, Manishin said. "The EU investigation could be more devastating because their antitrust laws are less developed than ours and give the enforcers far more greater procedural and substantive powers," he said.

More than 30 years of precedents have focused US antitrust enforcement away from competitor harm to the effect on consumers, Manishin said. "Since it's a new body of law and hasn't gone through what antitrusters call the 'Chicago School' precedents that favor business, there's much more of a populist theme to antitrust enforcement in Europe," he explained. "In Europe, it could be illegal to be just too big."

No matter what is the case's ultimate outcome, Alexiadis said Sun had found the right forum to vent competitive concerns against Microsoft.

"They're just transplanting whatever fight they have with Microsoft in the US--they're just bringing it to Europe--to a much more receptive, less cynical audience," he said. "The big difference: The European Commission is much more happy to hear what they're saying and are more or less happy to let them write the script for them."