MS out of the bundling business?

No delay in EC anti-trust compliance

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Analysis Quietly, just before Christmas, the European Court of first instance confirmed that Microsoft has no basis to delay the March 2004 decision of the European Commission, that it committed abuses under European anti-trust law, and ordered its compliance with the EC order.

Microsoft still has one layer left for potential appeal, to the President of the European Court of Justice, but there has never been a case where that Court suspended a remedy agreed by the Court of First Instance while it thought through its own conclusion. And Microsoft has agreed that in January it will make a version of Windows available in Europe without Media Player.

The €497m (now worth $650m) fine has already been paid by Microsoft and the other issues, those about making server interface information public, will also be complied with over the coming weeks, where they have not been already.

Microsoft has not so much lost its appeal against the anti-trust remedies, as it has lost the request that the remedies should be delayed until the appeal can be heard. It is generally accepted that it could take as long as five years for the appeal to be heard, and the status quo in the meantime is normally that the order to enact all remedies should be in place from when it is made. Microsoft had argued this would cause it irreparable harm and asked for the remedies to be suspended until the appeal could be heard. It is this request which has failed.

This is one rare case where US law should have punished Microsoft more forcefully and it was left to Europe to ensure that some form of market parity was achieved. Most observers that were cited in the US press in the days after the Court gave its verdict, were the wrong observers, with each of them echoed a resounding “So what?”

By wrong observers, we mean that US financial analysts (not known for their long term view or long term memory) and US technology assessment firms, were those asked for an opinion. It’s a pity that no-one asked an anti-trust lawyer.

The difference this made for IBM when it fell foul of the same laws back in 1980, was that IBM had a permanent watchful eye over it in the form of its “business practices” group, that was designed as a reaction to the US Justice Department case. Its role was to ignore commercial reality in other departments and rather ensure that no further infringements of anti-trust law occurred within IBM. The department’s effect was corrosive and no-one we ever spoke to at IBM in those days ever had a kind word for the mysterious and all-powerful department.

We would expect a similar division of voices now to occur within Microsoft. On one shoulder will be the standard attitudes of Microsoft saying: “Let’s tie this new piece of software into the operating system for free,” and on the other shoulder will be the anti-trust voice saying: “What and get another half a billion dollar fine?”

And there's the rub...

And that, in a nutshell is what Microsoft now has to deal with. Put yourself in its place. Can Microsoft engineer a way into any new markets without relying on “tying” software to its operating system. And if it can enter new markets in this way, what is the cost of entering them fairly? Another misstep will cost Microsoft dearly, and a second case might well break all previous records in terms of fines and further remedies.

One way that Microsoft will experience this is that the Commission decision always saw a need for a “monitoring mechanism.” The Commission said last week that it is discussing monitoring with Microsoft on the basis of a proposal sent to it by the company, on how to deal with logistics of monitoring.

The Monitoring Trustee will have to have both Microsoft (or ex-Microsoft) and non-Microsoft, technically competent staff on board, because its role is to oversee that Microsoft's interface disclosures are complete and accurate, and that the two versions of Windows are equivalent in terms of performance.

Almost certainly this needs to be a standing, semi-permanent group that explores from time to time the Microsoft offerings to check that no new interface hurdles have been placed in the way of competitors and that nothing new has been bundled that should not have been, especially in Europe.

And such a standing group will always have a willing ear at the European Commission for any more skullduggery.

A lot has changed since IBM fell foul of anti-trust law in Europe. For a start IBM had already agreed, in the dim and distant past, to a certain amount of unbundling. In the Microsoft case, the principles of anti-trust have not been delivered in so cut and dried a way. There is nothing saying that it cannot bundle new function into its operating system, only that when it does so, it must offer a version without the new function.

There is also nothing to say that new bundled functions in the operating system should be separately and fairly charged for, only that the two combinations, an operating system with new function and one without it, should not be differentially priced to advantage the “bundled” version.

It is a general principle of anti-trust that a monopoly business should not enter a new market with a product that is “subsidized” by a monopoly product. But Microsoft has gained from the fact that many software and internet businesses are based on a partially free offering, and so has not been forced to charge for its bundled products.

There would be a vastly different landscape in the PC business, and therefore in digital media, if browsers had to be offered for say $50 each, and that both media players, media player upgrades and digital rights management software from Microsoft also had a price tag on them, instead of being bundled.

If Microsoft steps over the line again, expect this principle of separate pricing to be applied, and get ready for some serious software competition, at least in Europe.

So of course this case will make a difference to Microsoft, a big difference, just don’t expect the effect all to arrive in the next two or three financial quarters.

Copyright © 2004, Faultline

Faultline is published by Rethink Research, a London-based publishing and consulting firm. This weekly newsletter is an assessment of the impact of the week's events in the world of digital media. Faultline is where media meets technology. Subscription details here.

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