Microsoft’s 12 Commandments

Brad Smith, Microsoft’s General Counsel, doesn’t look much like Moses, but he came down from Mount Sinai yesterday anyway to announce Microsoft’s new “Twelve Tenets to Promote Competition.” This is about the structure of competition in the economic space defined by Windows. We should take stock on where we are in the Microsoft antitrust cases and then assess how the 12 Tenets fit.

Microsoft continues to operate under the U.S. final judgment implemented after the D.C. Circuit unanimously found that Microsoft had illegally maintained its Windows monopoly. The D.C. Circuit overturned large parts of Judge Jackson’s ruling, both on liability and remedy, and the final judgment emerged from negotiations between Microsoft and the United States. That judgment was set to expire in the Fall, 2007, but Microsoft and the U.S. Department of Justice have agreed to extend parts of it for two years to address Windows/server interoperability issues.

In Europe, Microsoft was recently fined €280.5 million by the European Commission for failure to comply with the Commission’s March, 2004 decision. That decision addressed Windows Media player and Windows/server interoperability, but the fine, a first for the European Commission, addressed the pace at which Microsoft was documenting the required interoperability. Microsoft’s appeal of the Commission’s original decision is still pending in the Court of First Instance. And Neelie Kroes, the European Commissioner for Competition, is making noises about Vista.

As I have noted here before, the U.S. case seems to have pried open the Windows desktop to competition in exactly the way that we wanted. The 12 Tenets announced yesterday should continue that regime in place for some time.

We should assess how the 12 Tenets will measure up in the United States and Europe. I think that there is a clear dividing line separating the U.S. and the EU on the scope of Windows. I have articulated this in prior work as the distinction between presence and visibility. Presence means that the software comes with Windows, visible means that the software is visible within Windows. Presence and visibility matter for different audiences. Consumers can invoke visible software easily, but only sophisticated consumers will choose to invoke present but invisible software. But for applications developers, present but invisible means that you can count on certain software features in writing your application. You know the infrastructure base that Windows represents and can rely on that.

In the 12 Tenets, we see this in principle 4, which addresses exclusive promotion of non-Microsoft programs. As under the U.S. decree, personal computer makers “have the right to remove the means by which end users access key Windows features, such as Internet Explorer and Windows Media Player.” This is exactly the visibility/presence distinction: end-users won’t see these features if Dell removes the icons and other means of access, but the features will still exist on the machine, available to third parties.

And that is the line that separates the U.S. from Europe and focus on Windows Media Player (WMP), one of the two targets in the European Commission’s ruling. The media player market is a multi-sided market. Content producers issue content in a particular format and choose how many formats to support. The size of the installed base for the player will almost certainly influence which format a content producer will support. If WMP is everywhere—even if just present but invisible as might occur under principle 4—Microsoft may have a decisive advantage in competition over media formats. At least that was the EU’s theory.

So how to remedy that? The EU required Microsoft to issue a version of Windows without WMP, but Microsoft could charge the same price for both versions. The cut-down version hasn’t sold well—do I want more or less for the same price?—though requiring a price reduction would have pushed the EU into full-scale public utility style regulation.

I have argued in published work that we had a better remedy available, that we should have been adding rather than subtracting. Add other media players to Windows rather than subtract WMP. There is no natural limit to the scope of software products and adding other players would ensure that there is a level playing field in content-format competition.

But, I should say quickly, this is really a remedies question. The ubiquitous distribution that flows from Windows comes with the market power that Microsoft has. My own view is that Microsoft would have had that power with or without the illegal monopoly maintenance, so that there is no causal connection between that illegality and Microsoft’s distribution advantage.

But as Microsoft continues to wrestle with the EU, it will be interesting to see what happens going forward. The next reset point should come from the Court of First Instance, soon we should hope.

[Disclosure: The Law School has received grants from Microsoft in the past, and, I believe, continues to do so.]

Comments

[Kimball Corson]

This is like the the Devil writing a book on "How to be Good."