Microsoft Accepts the Rule of Law (EU Antitrust Edition)

I’m pretty amazed at the tone and some of the content of the report on Bloomberg about the fact that Microsoft decided not to appeal the decision of Europe’s second highest court and worked out a settlement. Not only does Bloomberg seem not to appreciate that even Microsoft is subject to the rule of law, but it gets a crucial item wrong.

To recap: 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.

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.

Today, as the Financial Times and Bloomberg reported, a bit more than a month after the verdict, Microsoft said it will not appeal the decision and will allow rivals to license its API and other relevant technical information. The EU has yet to decide how much to fine Microsoft for its failure to comply with a March 2007 ruling that it had charged too much to license interoperability information.

So how did Bloomberg present these developments? The doozies occur in the first two paragraphs and must have warmed the heart of Microsoft’s public relations department Whoops, let me not forget the tipoff to the misrepresentation. The headline reads, “Microsoft Abandons Fight to Keep Data From Rivals.”

From the flacks’ lips to the Bloomberg screen. The headline promotes Microsoft’s distorted view of well established antitrust law. And let us not forget that Microsoft escaped tough penalties in the US by a fluke. Judge Thomas Penfield Jackson was clearly disgusted by the Redmond’s company’s dissemblign in his court and was prepared to throw the book at them, but because he made the mistake of talking to the press substantively before the penalty phase was concluded, he was replaced by a cautious and clueless judge, Colleen Kollar-Kotelly.

Here are the opening paragraphs of the piece:

Microsoft Corp., whose software powers about 95 percent of the world’s personal computers, gave in to European Union demands that it help competitors connect to the Windows operating system.

Microsoft agreed to license proprietary information on how Windows shares files and printers to end three years of legal wrangling over a 2004 antitrust order. The accord will help Red Hat Inc., the world’s biggest seller of Linux systems, and Sun Microsystems Inc. offer replacements for Windows.

In the first paragraph, note the use of the phrease, “gave in to European Union demands.” Huh? The EU is a government. They make rules and have the right to enforce them. Microsoft has to comply if it wants to business there. “Gave in to demands” implies that the requirements were unreasonable or overreaching.

The second paragraph asserts that the settlement helps development replacement for Windows. Huh? The agreement gives developers access to the application interface layer so they can develop applications to work with Windows, not to make it easier to develop (or rather improve) replacements for Windows like Linux. The effect is to put developers of new programs on the same footing as Microsoft. Without good knowledge of the API, applications developed by Microsoft will run better with Windows than ones created by third parties.

This rather basic misunderstanding appears to have come about because the writer apparently didn’t understand what “open source” means, and equated it with Linux. Yikes. For the geeky among you, there is some useful chatter at Slashdot, which included a link to the EC ruling. Germane sections:

(999) Microsoft should be ordered to disclose complete and accurate specifications for the protocols used by Windows work group servers in order to provide file, print and group and user administration services to Windows work group networks. This includes both direct interconnection and interaction between a Windows work group server and a Windows client PC, as well as interconnection and interaction between a Windows work group server and a Windows client PC that is indirect and passes through another Windows work group server. The use of the term specifications makes clear that Microsoft should not be required to disclose its own implementation of these specifications, that is to say, its own source code. The term protocol relates to the rules of interconnection and interaction between instances of the Windows client PC operating system and the Windows work group server operating system…..

(1008) The requirement for the terms imposed by Microsoft to be reasonable and non- discriminatory applies in particular: […] there is a need to ensure that potential beneficiaries will have the opportunity to review, themselves or through third parties designated by them, the specifications to be disclosed; Microsoft should be able to impose reasonable and non-discriminatory conditions to ensure that this access to the disclosed specifications is granted for evaluation purposes only;
[…] to any remuneration that Microsoft might charge for supply; such a remuneration should not reflect the strategic value stemming from Microsoft s market power in the client PC operating system market or in the work group server operating system market;

And a more evenhanded write-up of the settlement from the Financial Times:

Microsoft finally admitted defeat in its three-year battle with the European Commission on Monday, as the US software giant agreed to comply with the regulator’s landmark finding that it was abusing its dominance of the market.

“I welcome the fact that Microsoft has finally undertaken concrete steps to ensure full compliance with the 2004 decision,” Neelie Kroes, competition commissioner, told a press conference in Brussels. “It is regrettable that Microsoft has only complied after a considerable delay, two court decisions and the imposition of daily penalty payments,” she said.

Under the deal reached between Ms Kroes and Steve Ballmer, the chief executive of Microsoft, early on Monday morning, the company will make it much easier for rivals to use its technology to develop their own programmes.

Microsoft also said it would not appeal the decisive September ruling by the European Court of First Instance, which upheld the Commission’s finding that Microsoft had broken EU competition rules. It ends three years of resistance that has cost €777.5m in fines.

Of three agreements, most significant is Microsoft’s commitment to allow open source software developers access to inter-operability information. Microsoft currently has 95 per cent of the market share in desktop publishing and more than 70 per cent in work group server operating systems.

Second, companies accessing this information will only have to pay a €10,000 one-off fee rather than a percentage of revenues.

Third, the royalties for a worldwide license, including patents, will be reduced from 5.95 per cent to 0.4 per cent. “That is far less than the 7 per cent of the royalty originally claimed” the Commissioner said.

The agreement has resolved the biggest outstanding issue between the Commission and Microsoft, relating to how much they can charge their rivals.

Businesses should now be able to shop around for alternatives to Microsoft products, knowing that they are fully inter-operable with Microsoft’s ubiquitous Windows desktop operating system, the Commission said.