Wednesday, May 22, 2024

EU’s Decision Clear; Results May Not Be

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As expected, the European Commission on Wednesday levied a record fine of $613 million and imposed other penalties against Microsoft, including stripping its Media Player software from Windows in European markets , after ruling it abused its monopoly position.

Although companies can’t sue another software company for being successful, Microsoft’s dominant market position made it a target. While no figures are available specific to Europe, analysts estimate that Windows holds 90 percent to 95 percent of the operating system market.

According to research firm IDC, the Windows server environment accounted for 54 percent of shipments worldwide in 2002, with Linux holding about 24 percent share. UNIX held 8 percent of the market and Novell’s NetWare platform at 7 percent.

Today’s decision, which the Redmond, Wash., software giant plans to appeal, will be watched closely in legal and IT circles in Europe and around the world.

Impact U.S. software markets

The EU ruling won’t have much effect in the United States, where Microsoft already has made changes to its practices and software following its settlement with the Department of Justice.

“The Appeals Court laid down some narrow parameters for what the Department of Justice could and couldn’t do with Windows, so the DoJ dropped it,” said Directions on Microsoft analyst Matt Rosoff. “Microsoft still has the legal right in the U.S. to include what it wants want in Windows.”

Will OEMs Change Their Ways?

In Europe, Microsoft’s sales channels and OEMs will ultimately have more influence on the market than the Commission.

Since most computer users get Microsoft’s operating system through the hardware manufacturer, it’s not clear whether breaking down the OS into finer granularity will have the impact some people think it will.

“How [hardware manufacturers] choose to package it may be very different from what the EU intends. They may decide to keep the package together as before,” IDC analyst Dan Kusnetsky said.

Such a strategy would save OEMs money on everything from packaging to support. In any case, the huge installed base of Windows machines won’t immediately upgrade, he said.

But the ruling could influence the evolution of Longhorn — the next major release of the Windows OS following XP. Earlier, Microsoft President Steve Ballmer and commissioner Mario Monti said Microsoft’s future actions were the sticking point in negotiating a settlement. That could mean Microsoft was willing to accede to demands about Windows, but balked at limits on Longhorn.

“I’d like to see Microsoft disclose exactly what it offered,” said Jupiter Research analyst Joe Wilcox. He said doing so would let the world see whether the company really made a meaningful offer or not.

Instead of being intractable, he said, “Microsoft might have been the victim of European politics. We wouldn’t know unless something were clearly disclosed — not leaked.” (Jupiter Research and this publication are owned by the same parent company.)

Kusnetsky said Longhorn is still a project, not a product, and Microsoft hasn’t made any decisions about what to include. He said that while Microsoft’s strategy has always been to keep piling on features at lower prices than you’d pay for them separately, the company has been grappling with concerns over the size and complexity of Windows. Strong competition from Linux shows that many users want cheaper, simpler software.

“If they are told to break Windows into pieces,” Kusnetsky said, “they may decide to change future products.”

Impact on Server Software and Operations

Kusnetsky said the impact on Microsoft’s server business is less clear.

“Unless they specifically say that Microsoft for the foreseeable future must adhere to guidelines, Microsoft will comply, but not for one moment longer.”

Jupiter’s Wilcox pointed out that Microsoft already discloses some of its server APIs in the States, following the DoJ settlement.

“There’s huge contention about whether Microsoft has licensed them in an easily accessible manner,” he said. “The trustbusters have chimed in and said no, so Microsoft is making adjustments yet again.”

Look for the same back-and-forth as the company tweaks compliance with the EU demands, Wilcox said.

Influence on Microsoft’s Digital Media Strategy

If Microsoft ships alternative media players in the box, “Which ones?” asked RedMonk analyst James Governor. “All of them? Will the EU choose? It’s a very difficult challenge.”

Governor believes that the only real solution to opening up the Media player to competition lies at the interface level, by making media software an open component.

See page 2 for what the appeals process will entail.

The Appeals Process

Of course, none of these effects may come to pass. Microsoft will appeal a negative ruling in the Court of First Instance, a court established by the European Union in 1989 to handle actions brought against the EU or its commissions, including requests for annulment of its rulings. Microsoft’s first step will likely be the standard opener, a motion to stay execution of the judgment until the appeal is heard.

This will be a critical ruling. If the court stays the judgment, Microsoft can go about its business while the appeal process slowly unfolds. A stay also might tip the court’s hand about whether its thinking diverges from that of the Commission.

In either case, the appeal could take years. If the Court of First Instance upholds the Commission’s ruling, Microsoft could take its case to the Court of Justice of the European Communities, the highest court in the EU.

“We think today’s decision amounts to the broadest compulsory licensing of IP rights since the European Community was founded,” Microsoft general counsel Brad Smith told reporters on Wednesday. “Once you give things to people, you can’t get them back.”

Therefore Smith, who had not received a copy of the complete ruling, said Microsoft will ask the Court of First Instance to suspend all remedies relating to such “compulsory licensing.” He said that under the Department of Justice consent decree, the company has entered into around a dozen licensing agreements for its server protocols to date, along with other evaluation licenses.

Smith complained that the Commission’s requirements for providing the server protocols are analogous to forcing a newspaper to make its articles available for competitors to print. “IP rights will be an important part of what we argue [in the appeal],” he said. Smith pointed out that the server protocols are protected by patents, and their specifications, by copyright. “The impact on our IP rights is quite sweeping.”

Microsoft CEO Steve Ballmer’s remarks indicate that the company may use nationalistic arguments to sway world opinion.

“It’s unfortunate that the Commission embarked on a remedy that shows so little regard for the work of the U.S. government and for processes established under its 1991 treaty with the Department of Justice,” Ballmer told reporters. “Microsoft is an American company, the complainants are American companies, the software is designed in the U.S., and the U.S. government already dealt with these issues.”

“I’d expect a vigorous appeal,” said Robert Badal, an antitrust specialist in the law firm of Heller Ehrman White & McAuliffe.

In the matter of the bundling of Windows Media Player with the operating system, the implicit assumption is that end users won’t bother to seek out and compare other media players; they’ll simply use the one that came with the computer. Microsoft’s position is that users can easily find and install competitors’ products, using the tools Microsoft provides. The EU’s idea is that it’s better to let consumers opt in to Windows Media Player, rather than opting out of using it.

“In this case,” Badal said, “you’d have to question whether asking Microsoft to remove something that’s part of its software is helping consumers. It’s fairly obvious that the ruling is intended to help specific competitors, on the theory that it thereby helps consumers, but that’s a fairly untested theory.”

The question for the Court of First Instance to decide, Badal said, is, “Do you want the market to decide these questions, or some European bureaucrats?”

Many Microsoft watchers think the Commission’s ruling will have little real effect.

“I think the EU ruling is a joke,” said Melanie Hollands, principle of hedge fund Koala Capital. “Even if Microsoft has to end up unbundling the audio and video from this version of Windows, which is not a technical problem whatsoever, the company will find a reason to put it all back together again the way it was in Longhorn or in some other product — or else the company will end up reaching a compromise with the EU.”

Regarding the server APIs, she said, “The company may have to let in competitors on their API code. That said, Microsoft programs would still work the best with Microsoft product.”

Technology and market share questions aside, the EU’s ruling — and the long investigation itself — will make it easier

for others to successfully make a similar case against the No. 1 software maker.

“You will definitely continue to see more complaints to the Commission, which is showing itself to be a potentially

receptive and fruitful venue, and hopefully will be able to move more quickly in the future,” said Mark Ostrau, co-chair of the antitrust group of the technology law firm Fenwick & West.

Individual EU member states can file their own anti-competition actions, Ostrau said, just as in the U.S. both states and the Feds can bring actions.

“Follow-on private actions are not as prevalent in [European Union] member states as in the U.S.,” according to Ostrau, “and would more likely happen only after a European Court of Justice ruling. But what the commission does can affect the legal analysis that a member state’s court might bring.”

The problem for Microsoft is that each of these cases cumulatively makes it easier for the next one. “The documents and testimony are out there, you don’t have to go hunting for it,” Ostrau said. “Oftentimes,the document request is, ‘Give us all the documents you gave them.'”

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