A Look at the EU Ruling Against Microsoft

To those of us here in the United States, the notion of an international body imposing strict antitrust limits on an American economic superpower like Microsoft is somewhat unsettling. It shouldn't be: As Microsoft general counsel Brad Smith noted yesterday morning during a hastily convened press conference, Europe is an increasingly important market for the company as well as a vital area for employment, partners, and research and development investments.

More relevant, perhaps, is that when it comes to antitrust sanctions, it is the strictest that matters most. In this sense, the EU antitrust case against Microsoft now surpasses in import anything that Microsoft has dealt with in the US. Thanks to the EU's decidedly pro-consumer and pro-competition bent, it has emerged as the governmental body that will influence Microsoft's products the most in the months and years ahead. As was the case with Windows Vista, Microsoft will need to consult with EU regulators on major products going forward.

At its heart, the EU case against Microsoft has two major concerns, and it may be worthwhile to discuss whether these issues still resonate today, four years after the initial EU ruling and 9 years after the EU received its first formal complaint about the software giant.

First, Microsoft has been found to have abused its market power in the operating system market by illegally bundling its Windows Media Player (WMP) into the Windows OS. This charge mimics a similar product bundling charge that was levied against Microsoft in the US, with Internet Explorer (IE) and other so-called middleware, and in other markets around the world. As part of its EU antitrust compliance requirements, Microsoft issued the N versions of Windows XP and, later, Vista, which do not include WMP software. These versions sell for the same price as the full versions of the products, and have sold poorly.

While the lack of sales of the N versions of Windows may seem damning, a more sensible measurement might be WMP's market share: Did WMP gain significant market share during the period of time between 2004 and 2007? According to Nielsen/NetRatings, WMP currently owns 50 percent of the market for media player software, dramatically higher than its share half a decade ago. But WMP's share has grown just 2 percent in the past year. The culprit, of course, is Apple's iTunes, which now controls 19 percent of the market (third behind both WMP and the 22 percent for RealNetworks' RealPlayer, which has been losing share steadily year-over-year). iTunes growth in the past year was a whopping 48 percent.

So did Apple see huge growth with iTunes solely because Microsoft was no longer forced to bundle WMP with Windows? Clearly not. During the past several years, Microsoft has sold a negligible number of Windows N products. Instead, iTunes has experienced its growth jump, ironically, thanks to some product bundling of Apple's creation: Users of the company's hugely popular iPod portable media players are required to use iTunes. Apple reported earlier this month that it has sold over 110 million iPods to date and has distributed over 600 million copies of iTunes electronically.

Of course, the EU's stance with media players may be more about general issues of product bundling than it is about specific instances of abuse. One might argue that the EU's strict limitation on illegal bundling in monopoly products like Windows has kept the company from bundling other technologies and products and will continue to do so going forward. And sure enough, a cursory examination of the products that were bundled in both Windows XP and Vista reveals a sea change in Microsoft's attitudes about comingling code. Today, a wide number of products and services are made available for optional download via the company's Windows Live online services rather than bundled directly into the OS itself. This change has resulted in a version of Windows that is less restrictive to both competition and consumer choice.

The second point of the EU antitrust case against Microsoft concerns the licensing of technology protocols in the workgroup server market. Indeed, it was a 1998 Sun Microsystems complaint about this topic that touched off this entire legal mess. Microsoft has fared poorly in complying with this part of the ruling to date, but Microsoft lead counsel Brad Smith said Monday that a great deal of work has been done and some progress has been made. There are, however, some outstanding issues, he noted, including licensing costs and the protection of trade secrets. Smith says Microsoft is eager to work with EU regulators to sort these issues out.

The point behind the licensing requirement is that the EU wishes to prevent Microsoft from illegally gaining a monopoly in the workgroup server market similar to the way it gained its monopoly on the desktop. (According to the EU, it did so by product bundling and by keeping competitors from creating products that work as seamlessly with the OS as does Microsoft's own products.) This is a valid concern, and one that users of Microsoft's products should take to heart: A stronger competitive landscape benefits users of all software systems, and one only needs to look to the dark days of Windows Millennium Edition (Me) and IE 6 to see how poorly Microsoft performs when there's no viable competition.

So what happened in the server market in the years since the EU handed down its ruling against Microsoft? Here, the software giant has made solid gains: Windows Server outpaced UNIX-based servers from a revenues perspective for the first time in 2006 and made its biggest gains in the biggest part of the market: Low-end workgroup servers. Windows Server-based servers grew almost 19 percent year-over-year in the past 12 months, according to IDC, and power almost 40 percent of all servers worldwide, compared to 13.6 percent for Linux. Microsoft earned $5 billion in revenues from Windows Server in the second quarter of 2007, and that market has joined Windows and Office as one of the company's top revenue generators. That said, Linux continues to grow quickly and will likely mop up some legacy UNIX market share over time.

If you believe that actions speak louder than words, however, you may be heartened by the surprising number of interoperability pacts that Microsoft has made over the past year or so. The company has partnered with a bewildering set of competitors, including the likes of Sun Microsystems (which had jumpstarted the EU investigation years earlier), Novell, Nokia, and many others. "The world, the industry, and \[Microsoft\] have changed enormously since 1998," Mr. Smith asserted yesterday. "And we will \[further\] broaden our interoperability partnerships in the weeks to come." The question, of course, is whether these interoperability moves were made as a result of EU action or because Microsoft has finally woken up to the evolution of the competitive landscape. We may never know the answer to that question, but the fact remains that these changes occurred only since the 2004 EU ruling, and that they will ultimately benefit users of all server systems.

On a related note, this week's ruling has wide-reaching ramifications for other IT industry companies that may run afoul of the EU's stricter antitrust laws in the days ahead. Two obvious examples are Apple and Google. Apple has absolutely gained a near-monopoly position in the portable media player market in part by artificially bundling its iTunes and iPod products and by refusing to license the digital rights management (DRM) scheme that ties these and other Apple products together. Apple's strategy is as single-mindedly monopolistic and anti-competitive as anything Microsoft has ever done, and it's no coincidence that Apple will soon face EU regulators to discuss these issues. (It's also no coincidence that Microsoft's Smith dropped the words "Apple" and "iTunes" several times during a Monday press conference.) Google, meanwhile, will soon attempt to defend its desire to purchase DoubleClick, an acquisition that will give the online giant a decided edge over competitors in online ad sales.

So. What do I think of all this? Long-time WinInfo readers may recall my stance during the company's US antitrust case. I felt that the company had illegally gained and abused its market dominance and should have been split into two or more separate companies and I still believe that such a conclusion would have benefitted Microsoft, the industry, and its customers. However, the company's behavior in the years since its 2002 settlement with the US government suggests that the consent decree--which I viewed as weak and ineffectual at the time--has had its desired effect. Microsoft is no longer the abusive monopolist it once was, and while we may quibble about the ways in which the company rose to power, it's clear that Microsoft is a better partner and competitor today than it was a decade ago.

While the EU's sanctions against Microsoft appear somewhat Draconian, it's hard to argue with the complaints they address. Microsoft did indeed bundle WMP with Windows in order to gain market share in the digital media market, a strategy that the company employed with countless other products in the past. That a new competitor in iTunes has arisen via similar anticompetitive means is somewhat ironic, but it doesn't discount the very real problem of a single supplier dominating such a crucial market. (And it's not like iTunes is "better" software than WMP; iTunes has simply ridden the iPod's coattails as surely as did WMP with Windows.) Microsoft should be prevented from artificially bundling separate products with Windows. The result is better for users, which, ultimately, is what I'm most concerned with.

With regards to the server market, I have a very simple point to make: Microsoft's server products are superior to the Linux- and UNIX-based competition, especially in the small- and medium-server markets addressed by the EU. Windows Server-based products are easier to deploy and maintain, offer far better functionality, and are arguably better values than anything on the *nix side, and Microsoft's gains in this market are an obvious reflection of this fact.

That said, Microsoft should be prevented from illegally extending any dominance it achieves in the server market to related server products, as those products should simply succeed or fail on their own merits. By requiring Microsoft to license interoperability protocols to third parties in a manner that respects the company's intellectual property assets, the EU is ensuring that the market will ultimately decide which server technologies are successful. Microsoft's recent gains with interoperability partnerships are welcome, but it's unclear whether these partnerships would have come about at all, or so soon, without EU intervention. This is a positive step for the industry.

In short, while I do feel that Microsoft has become a bit too accommodating to antitrust regulators in recent years, it's hard to argue that the EU antitrust case has had anything but a positive effect on the industry, at least so far. The danger, of course, is that the EU will use its success here as a jumping off point for less viable antitrust cases against less-deserving foes. Apple and Google, however, are not in that group, and both companies should expect to come under the watchful eyes of antitrust regulators in Europe and around the world. It's important that this type of regulation be applied evenly and fairly to all that abuse competitors and customers alike. The positive (if perhaps not final) outcome of the Microsoft antitrust case in Europe this week shows how such a thing is possible.

TAGS: Windows 8
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