Microsoft Holds Its Ground as EU Imposes $613 Million Fine, Sanctions

by Timothy Prickett Morgan

When you have over $50 billion in the bank, like Microsoft does, the record-breaking $613 million fine that the European Commission's antitrust authority just imposed on the company this week, after finally deciding to sue Microsoft for antitrust violations following a five-year review, does not really register. And the stiff sanctions that European antitrust commissioner Mario Monti is asking for may all come to nothing, if the experience of the U.S. court system is any measure.

Microsoft CEO Steve Ballmer seemed a lot calmer than chief counsel Brad Smith during their conference call with the media today, and even Smith was not that excited. To hear Monti, Ballmer, and Smith talk about it in their press releases this week and last, they are all just courteous professionals having a gentlemen's disagreement about a minor matter. And how could it be otherwise, after the bitterly fought U.S. antitrust case ruled on by Judge Thomas Penfield Jackson was essentially overturned and a settlement forged after an appeal by Microsoft essentially took all of the teeth out of the settlement. There's a reason why Ballmer and Smith are calm. Monti had the full backing of the EU member states to sue Microsoft but only imposed a $613 million fine, when it could have imposed a $3 billion fine. Moreover, the sanctions Monti wants to impose essentially require Microsoft to create a version of Windows that does not include the Windows Media Player and to publish more of the internal specifications of the server implementations of Windows so competitors with other server operating systems can better interoperate with Windows. It could have been worse.

Microsoft believes that it has the right to integrate whatever feature it wants into the Windows operating system. Period. And if that integration makes it hard for third-party competitors to break into the software racket, then too bad. We could all debate endlessly about whether European or U.S. antitrust law defines this as the tying of products, or whether Microsoft has abused its near monopoly on desktop PCs to drive out competitors and to extend that monopoly to servers and, someday, to applications software. The fact is, monopolies are not illegal, according to most interpretations of the European and U.S. law. What is illegal is using monopoly power to stifle competition in a way that costs consumers money. It is very hard to prove, in a legal sense, that Microsoft is gouging customers, but then again, it has 1.5 years' worth of revenue in the bank as cash, and no company in the history of the world has built up and maintained such a cash hoard. That is monopoly money, everybody, only it is the kind you can really spend.

According to Ballmer, Microsoft had proposed that it would bundle its Windows Media Player and three other players on Windows platforms around the world in order to settle the case. This is arguably a very reasonable solution. But Monti didn't like that solution, and is pushing for Microsoft to create a version of Windows without Media Player in it. Smith said today that ripping out the Media Player will prevent some 20 other Windows features that depend on it from functioning even after a third-party media player is added to the machine. This seems to indicate more about the way Microsoft codes applications for Windows than about the necessity of Media Player. The antitrust case in the United States some years back concerning the Internet Explorer Web browser mirrored this situation. IE is used as an interface for viewing files and applications within Windows itself, so ripping it out doesn't solve anything. In fact, it makes Windows unstable and less usable. But Microsoft could have coded Windows differently, so any browser could do the same things as IE did for Windows. It chose not to.

Ditto for the server side of the suit that the European Union has brought against Microsoft this week. The U.S. consent decree settlement compels Microsoft to divulge certain specifications that allow makers of other operating system platforms to allow their servers to better interoperate with Windows clients. Given the fact that well over 95 percent of the clients out there in the world are running Windows, if your server can't interoperate well with Windows, then you are sunk. That is why Sun Microsystems filed a complaint with the EU in late 1998, claiming that Microsoft didn't divulge enough of the inner specifications (not source code) of Windows to allow Sun to make its Solaris servers interoperate with Windows clients and servers. Throwing the server specs into the mix is further than the U.S. consent decree went, according to Ballmer and Smith, who were careful to say that they had not seen the full remedy and sanctions proposed by Monti yet. Smith said that the sanctions amounted to what was effectively a compulsory licensing of Microsoft's intellectual property, and said further that it would ask for the European Court of First Instance, the court that will hear Microsoft's appeal, to stay Monti's sanctions pending an appeal. Obviously, as pointed out by Ballmer, once the server spec genie is out of the bottle, it cannot be put back in. Microsoft's point of view, which is completely understandable, is that this information and technology is very valuable and opening up those specs would have a dramatic impact on its copyrights, patents, and intellectual property.

When you boil the situation down to its essence, as Smith did today, the EU sanctions compel Microsoft to create an EU-mandated derivative work of a copyrighted product (Windows without Media Player) and also restricts Microsoft from creating its own derivative work (Windows with Media Player integrated) based on its own copyrighted material.

What none of these legal arguments ever really gets to is the essence of what Microsoft's Windows monopoly really is: It is a product that brought computing into hundreds of millions of homes in 15 years that, through innovation, integration, and low prices, created for itself a natural monopoly utility. In a sense, it is no different from electric, gas, transportation, or telecom utilities that were tolerated for very good reasons for many years by governments. And maybe, as such, it should be a regulated utility with mandated profit levels for investors, products, and services. "Ma Bill" kinda has a nice ring to it. Microsoft, more than any other company, has driven the cost of computing ever downward. No question about it. But that is not the be-all, end-all for the public good if Microsoft can on a whim stifle another company's innovation and ability to compete in the Windows market.

This situation will never resolve to the satisfaction of any party, and the European Union would be wise not to spend that $613 million just yet.