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“YOU asked for it, now live with it.” That was, in essence, the message spread by Microsoft's lobbyists after the European Court of First Instance upheld a landmark antitrust ruling against the world's largest software firm on September 17th, dealing it the most stinging defeat in nearly a decade of antitrust litigation. Emboldened by this decision, Europe's anti-monopoly squad will now go after other technology firms with high market shares, the lobbyists warn, forcing them to give up valuable intellectual property and curbing the incentive to innovate.
Yet it is unlikely that that Neelie Kroes, the European Union (EU) competition commissioner, will now “be leading a prison march of the world's most successful firms through her Brussels doors”, as one lobbyist put it. The judgment's consequences are far-reaching, but in a different way. If it is not overturned—as The Economist went to press, Microsoft had not said whether it would make a final appeal—the firm will, in effect, lose much of its sovereignty over the virtual territory staked out by its Windows operating system.
Microsoft ended up in the dock in both Europe and America because it tried to protect and extend its Windows monopoly in two ways. One was by bundling other types of software along with Windows, notably its web browser, a move that triggered the antitrust action in America. Its other approach, which lay at the heart of the European case, was to withhold information from rivals that would have allowed their software to “interoperate” well with Windows over a network.
With a new Republican president in power, America's competition authorities decided in 2002 not to pursue the case championed by the Clinton White House and instead negotiated a settlement with Microsoft. This “consent decree”, large parts of which will expire in November, amounted to little more than a slap on the wrist. It failed to administer any penalty and let Microsoft add new software elements to Windows so long as PC-makers were allowed to add rival products too. The provision regarding interoperability was also limited: the requirement to provide the necessary “communication protocols” applied only to the version of Windows that runs on individual PCs, and not the one running on the servers that dish up data on corporate networks.
The European Commission's initial ruling against Microsoft in 2004 can be seen as an attempt to address these shortcomings. The commission ordered Microsoft to sell a version of Windows without its media-player software, the bone of contention in Europe when it comes to bundling. It ruled that the firm had to provide information on how to interoperate with Windows servers. The commission also imposed a fine of €497m ($613m), which has since grown to €777m ($990m) because it determined that Microsoft was not fully complying with its decision.
The European court has now upheld these remedies. Even more importantly, it largely endorsed the commission's legal reasoning. It argued, for instance, that withholding information that is needed for PCs and servers to work together constitutes an abuse of a dominant position if it keeps others from developing rival software for which there is potential consumer demand. In such cases, the information cannot be refused even if it is protected by intellectual-property rights, as Microsoft had argued.
With its ruling, the court has set a precedent that means Windows is no longer simply private property with which Microsoft can do as it pleases. And this will certainly apply to any other firm that manages to build a similarly crucial and long-lasting digital monopoly. Even today, with software increasingly delivered as a service over the internet, Windows is protected by something known as the “application barrier to entry”, meaning that so many programs run on it that rivals have a hard time getting users and software developers to switch.
Yet, whatever the lobbyists say, European regulators are unlikely to go after every technology firm with a big market share. There are not many similarly dominant computer platforms. What is more, most of the potential investigations that may follow are different in kind from the action against Microsoft. In the case of Qualcomm, for instance, competitors have complained that it is charging excessive royalties for its patents on mobile-phone technologies. In the case of Apple, commission officials have already said that they are wary of proposals to force the firm to open iTunes, its online music store, to music-players other than its iPod; a separate investigation into iTunes concerns variations in pricing between European countries, rather than technological lock-in. Even the continuing investigation of Intel is not directly comparable to the Microsoft case. The world's biggest chipmaker, the commission charges, has used abusive tactics such as offering rebates to prevent computer-makers from using chips made by its rival, AMD.
For the time being, the commission can apply the precedents set by the Microsoft ruling in only one case: Google, the world's leading web-search and online-advertising firm. Just as America's Federal Trade Commission is now doing, the EU's competition authorities will look closely at Google's planned takeover of DoubleClick, another leader in online advertising. And if Google becomes a central storage vault for data such as users' location and identity, as some fear, European regulators may one day try to compel the firm to give rivals open access to this information—rather as they have now forced Microsoft to release its communication protocols.
Microsoft itself is not out of legal trouble, even if it chooses not to appeal. The commission has yet to determine whether the information the firm has supplied will really ensure interoperability. Still open, too, is the issue of how much Microsoft can charge firms that want to license its protocols. Then there is the question of whether Microsoft should be forced to license the information to makers of open-source software. The firm argues that this would be tantamount to giving away the shop, but the commission thinks it would promote competition by advancing open-source rivals to Microsoft's products. And further investigations may yet follow into Office, Microsoft's dominant suite of business software, and Vista, the latest version of Windows.
No wonder Microsoft is stoking fears that the commission plans to go on an antitrust rampage. It has prompted a political backlash that may discourage the EU from staying on the case. In America the talk is of a “new form of protectionism”. After the European court's decision Thomas Barnett, the head of the antitrust division of the Department of Justice, warned that it “may have the unfortunate consequence of harming consumers by chilling innovation and discouraging competition”.
With this judgment Europe and America have clearly moved further apart in antitrust matters. But whether, as some fear, these differences turn into a full-blown transatlantic conflict remains to be seen. After all, the administration in Washington will probably have changed several more times before the Microsoft case finally draws to a close.
