Microsoft’s intransigent behavior has finally caught up with them. To recap the story: in December 2004, Microsoft lost its final appeal on an EU antitrust case in which it was found guilty of tying its operating system to its media player, undermining competition and hurting consumer choice, and for failing to give rivals the information they needed to compete fairly in the market for server software, The Redmond company was fined a record $613 million.
To address the server complaint, Microsoft was ordered to license technical information to enable outside companies to design products that would run well on Windows (called API, the application program interface). Note that this isn’t a particularly onerous request. Microsoft makes that sort of information available for free except in areas where it is trying to leverage its monopoly.
Microsoft acted in less than good faith through this entire exercise. It appeared to be delaying rather than complying. For example, Microsoft was asked to propose royalties for its API. Now consider Microsoft’s response: up to 5.95% of revenues. The EU’s technical expert, Neil Barrett, who was recommended by Microsoft, calculated that it would take software companies 7 years to recover their development costs. Now how many products last 7 years? And in particular, how many software products last for 7 years? Cost recovery looks like a fantasy. Barrett determined that even a 1% royalty would be too high, and 0% would be more appropriate.
As the New York Times summed up the decision:
In a stinging rebuke to the world’s largest software maker, the second-highest European court rejected today a request by Microsoft to overturn a 2004 European Commission antitrust ruling that the company had abused its dominance in computer operating systems.
The European Court of First Instance, in a starkly worded summary read to a courtroom of about 150 journalists and lawyers here, ordered Microsoft to obey a March 2004 commission order and upheld the €497.2 million, or $689.4 million, fine against the company.
The court’s presiding judge, Bo Vesterdorf, reading a summary of the decision on his final day in office, said, “The court finds the commission did not err in assessing the gravity and duration of the infringement and did not err in setting the amount of the fine. Since the abuse of a dominant position is confirmed by the court, the amount of the fine remains unchanged.”
“The court said the commission wins on virtually everything,” said Thomas Vinje, a partner at the law firm Clifford Chance and part of the legal team for the European Committee for Interoperable Systems, a coalition that includes Microsoft opponents like I.B.M. “The court has spoken. The commission was right.”
Bloomberg notes that further European actions against Microsoft are pending:
The company faces another possible probe in Europe. In February 2006, the European Committee for Interoperability Systems, a group that includes International Business Machines Corp. and Oracle Corp., claimed that Microsoft uses dominance in word processing and spreadsheets to thwart rivals.
Today’s decision “establishes principles for the behavior of this company which it will have to abide by in a broad variety of contexts and with respect to a broad variety of products,” said Thomas Vinje, a lawyer at Clifford Chance in Brussels who represents ECIS.
Kroes said today the commission, which is still weighing whether to open a formal probe of ECIS’s complaint, will comment on the case “not too far from now.”
The Financial Times reports that this was a key victory for the EU anticompetition regulator:
Monday’s ruling is likely to have big repercussions both for the regulator and for Microsoft and its rivals. A defeat for the Commission would have seriously weakened Brussels’ ability to pursue fresh cases against Microsoft and other dominant groups, and would have dealt a big setback to similar efforts by regulators in countries like South Korea.
The European Court of First Instance, which issued the decision, is the EU’s second highest court. Microsoft has not yet said whether it would appeal the decision.
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http://naybob.blogspot.com/2007/09/harbinger-of-things-to-come.html
Yves,
Thanks for the mention today. Do you remember what happened April 3rd, 2000?
(The Dot.com bust) from an investor confidence standpoint, it was April 3rd, 2000 that really kicked things off the ledge.
At that point, the SP500 was “only” down 16% & the NAZ 18%.
What happened on that fateful day? After 2 years of legal wrangling, Microsoft was dealt a decisive antitrust defeat by the US Justice Dept.
Deja Vu all over again?
Regards,
The Nattering One
With all due respect, this is bizarre account. Rivals of Microsoft include companies whose business models suffered as hardware prices dropped and they could not deal with it. These are the companies who enjoyed very high premiums and took advantage of their brand names during IT boom by selling lower quality products at higher prices. On consumer market, it seems strange that 6% royalty would drive anyone out of business. After all software market is different from retail sales with paper thin margins. Another point, long term consequences of the decision are unclear for market overall.
Ironically, decision delivers no good to consumer. In a nutshell people can get cut down version of software, at the time when completely free Linux alternative is available. Microsoft competitors in different markets are doing not so bad, let’s take a look at IBM, Google, Apple. No one seem to be hurting.
And Wall Street too does not see Microsoft as dominant company and puts it at lower PE than that of Googles of the world.
It seems like in this particular case regulation came in wrong place at wrong time.
Hey, it’s me again. Quote from WSJ fresh from the press regarding level of competition:
“The IBM package, called Symphony, can be downloaded free of charge. The home edition of Microsoft’s Office lists for $120 on Internet retail sites. IBM will also give away …”
Mr. Nabob,
Thanks for the comment. While I remember that day well, I had completely forgotten that the Microsoft decision was the trigger.
v,
You can’t generalize from the consumer market to the corporate market, which is where the royalty discussion took place. The consumer market is a high fixed cost business (the cost of development and marketing) but the marginal costs are very low. Software for the commercial market is different, lower marketing costs, higher selling costs, and much more in the way of ongoing support (big companies won’t tolerate long hold times, for instance). Thus, you can have a viable product with smaller revenues, since you have to earn a return on a lower level of fixed costs, but the margins are less attractive.
My information is a bit stale and spotty, but it isn’t typical for margins to get better in markets over time. A client who developed software for the corporate market raised funds for most of his planned products assuming margins of 55%. If you know anything about VC, companies rarely achieve the targets they show in their plans, and he certainly didn’t. A 6% royalty would had had a big impact on his economics.
Similarly, Oracle, which dominates a mature market (hence one would assume oligopoly pricing), does not earn a profit on the sale of its databases. Selling and negotiating the deals is very costly. The profit is entirely in the maintenance contract. That in turn requires that you have produced a not-too-buggy and stable product. Otherwise, your costs of meeting the servicing obligations can exceed the annual payments.
Yves,
17 trading days later the market peaked and the rest is history.
I do not believe that these decisions swayed the markets fate in either case.
However, it is scary how close both Microsoft decisions came to market collapses.
The Nattering Naybob