Microsoft Loses in the EU Court of First Instance

The European Union’s Court of First Instance issued its decision in the Microsoft case today upholding in most respects the March 23, 2004 decision of the European Commission. That decision had concluded that Microsoft had abused a dominant position by tying Windows media player to Windows and by refusing to make available to competitors information about protocols that would make it easier for third-party products in the work group server operating system market. That decision had also imposed a fine of roughly €500 million and had ordered a monitoring trustee going forward to ensure compliance with the decision. The Court of First Instance upheld everything other than the monitoring trustee.

The decision is a behemoth—the pdf runs 248 pages—and even the press release runs five pages. Serious analysis of the ins and outs of the case law will require some days, but I think we can offer a quick assessment of the likely market impact of the decision:

1. €500 Million Fine. This is a great deal of money, even in the world of Microsoft, but ultimately, this just knocks down their stack a bit. Market impact?: little to none.

2. Required Unbundling of Windows Media Player. The European Commission required Microsoft to offer separate with and without versions of Windows: one version that could include the Windows Media Player and one that would come without it. Microsoft and the EU tussled over the name of the reduced technology version—I think Microsoft wanted to call it “Windows, the Junky Version Required by the EU”—but as the European Commission did not require Microsoft to charge a reduced price for the reduced function version, it has had little market impact. I understand the logic of the EU position—indeed, published an article before that remedy was announced suggesting exactly that remedy—but the market response has been as what one might have forecast: very little adoption of the reduced technology version. That in part caused me to switch suggested remedies in a later paper (simple version: don’t subtract from Windows as the EU did, but add to it instead by requiring Microsoft to add competing products as part of its Windows distribution (the so-called must carry remedy)). Market impact of required unbundling: again little to none.

3. Required Interoperability Disclosure in the Work Group Server Operating Systems Market: This is the one that could matter. In some sense we might judge that from the fact that Sun and other competitors pushed the Commission to pry open the Windows communications protocols. Presumably that is some indication of their belief that they will benefit from greater access to those protocols. What that benefit is is less clear to me. John Frank, a Microsoft attorney, gave a talk to our students here at the Law School last Spring. I walked away thinking that I needed to have a greater technical understanding of the technology, particularly the multimaster replication technology. I hope the tech bloggers address this today. And this is one where we need to go both ex ante and ex post. Distributing Microsoft technology to its competitors will almost certainly enhance competition ex post, but a general policy of doing this will reduce investment incentives ex ante. Market impact of greater interoperability?: Best guess is positive given the existence of the technology, but we should hear from the tech guys.

As the EU press release notes, the next step for Microsoft is an appeal to the EU Court of Justice. For me, the next step is trying to figure out how to edit the 248 pages down to the roughly 20 we can do in my antitrust class (currently scheduled for class 25 this Fall). Perhaps I can just keep every 12th word?

Comments

[Doug Lichtman]

Randy -

Any thoughts on how this decision changes the dynamics for other firms who might now come before the EC? The popular press response to this decision has been not to focus on the implications for Microsoft, but instead to focus on how this might embolden the EC to use its power against firms like Apple, QCOM, and Rambus. Indeed, even Brad Smith spoke about that early on in his first response to the announced decision.

Are the popular press writers correct in thinking about this as a game-changer in terms of the EC's likely influence going forward? (I fear so, but curious your thoughts.)

Doug Lichtman
Professor of Law
UCLA

[Randy Picker]

Doug,

Nice to see you back in our virtual halls! I understand the popular press instinct--I said exactly this in talking to press folks yesterday--but I still need to fight my way through the full decision.

For Apple, the obvious issue is interoperability given the way that it has forced updates throughout the iPod ecosystem to break interoperability (with RealNetworks before and more recently with ring-tones).

I haven't looked at the EU stuff on Rambus; the US version wasn't that interesting intellectually--mainly about bait and switch in the standard setting process and the question of whether we were going to punish that through antitrust or fraud or something more equitable--and didn't raise the intellectually tricky issues at stake in Microsoft on product scope and interoperability.

I don't know enough about the QCOM situation to say anything (have been carrying around the recent decision for the last couple of weeks but still haven't read it).

I will do another post on the legal substance of the EU MS decision when I get through it.

Randy

[Jesse Markham]

Randy.

I wonder if those of us who teach antitrust law (I teach the course at USF Law School) could somehow share these burdens when new cases come down in mid-course. The squibbing function is not one we ought to all replicate.

Jesse Markham

[Roach]

Jesse, your attempt at horizontal restraints and market division is appalling. ; )

[Matthew Hartogh]

Matthew Hartogh
Maastricht NL

Sir,

Imporant issues have been raised regarding the interoperability of Apples iPod system in light of this ruling and more generally about this ruling as a precedent generally for the entry of smaller technology firms in the Europe market.

Intellectual Property is of vital importance to these firms.

Justice Brandeis pronounced on the issue of privacy and due process which is relevant to the instant case:

Justice Brandeis's dissent in
Olmstead v. U.S. (1928):

 "The makers of our Constitution understood the need to secure conditions favorable to the pursuit of happiness, and the protections guaranteed by this are much broader in scope, and include the right to life and an inviolate personality -- the right to be left alone -- the most comprehensive of rights and the right most valued by civilized men. The principle underlying the Fourth and Fifth Amendments is protection against invasions of the sanctities of a man's home and privacies of life. This is a recognition of the significance of man's spiritual nature, his feelings, and his intellect."

-- posted by Matthew Hartogh