The European Court of First Instance (CFI) recently upheld the decision of the European Commission, taken in 2004, to fine the Microsoft Corporation a total of EUR 497 million for abuse of its dominant position in the market for work group server operating systems and streaming media players.

The story behind the Microsoft case dates back several years, in particular to Sun Microsystems’ complaint in 1998 before the European Commission. The issues that the European Commission has been examining since are twofold.

Firstly, the Commission held that Microsoft had failed to provide rival companies with the necessary level of information that would allow them to develop products to compete with Microsoft’s Windows operating system. This aspect of the case relates to the disclosure of interoperability information to rivals in order to make their own products inter-operable with those of Microsoft.

Secondly, the Commission decision relates to the tying aspects of the case, namely the offering of Windows Media Player (WMP) as a bundle with Microsoft’s operating system. Consumers were thus forced to buy the package on offer, with no alternative choice available.

In September 2007 the CFI upheld the Commission’s conclusions on both issues, leading to a landmark judgment in the history of the application of Article 82 EC Treaty. Microsoft, on appeal, was successful on a single point, namely on the appointment of a monitoring trustee to ensure Microsoft’s compliance with the Commission decision. This is however a relatively minor point within the CFI judgment and does not alter the more substantial reasoning behind the decision or the calculation of the fine.

The European Commission has the power to fine companies that engage in anti-competitive practices up to 10% of their worldwide annual turnover. The fine levied on Microsoft falls far below 10% of that particular company’s turnover, yet remains one of the largest fines ever imposed by the Commission. When coupled with the recent fine for non-compliance with the 2004 Decision, it is definitely a considerable amount and the largest ever imposed in the history of antitrust in Europe.

The Commission’s message is quite clear. Microsoft, a leading worldwide brand with a near monopoly in the personal computer (PC) operating systems market, had engaged in behaviour that constituted an abuse of its dominant position. Microsoft, being super dominant, had a special responsibility not to behave in the market in such a way as to hinder effective competition.

What is of particular interest in the CFI judgment is that all of Microsoft’s arguments were rejected on the basis of coherent legal, and, to a great extent, economic analysis undertaken on the part of the Commission. In addition, an interesting feature of this case is that the Commission, and in turn the CFI, heavily relied on factual information to support their legal and economic thinking. Yet, Microsoft itself had provided most of this information.

Microsoft’s refusal to provide and license interoperability information

Microsoft argued that intellectual property rights protected the interfaces and protocols of its own work group server products and that Microsoft’s ability to rely on such IPR protection was the cornerstone of Microsoft’s innovation initiatives. However, the CFI found that the Commission was right to take steps to allow Microsoft’s competitors to develop better products and market operating systems that differed from Microsoft products. The Commission did not go so far as to require Microsoft to reveal confidential information that would enable its competitors to create identical systems or to license its source code.

Microsoft failed to prove that disclosure of interoperability information would significantly affect its incentive to innovate and that it would affect competitors’ innovation. The CFI therefore found that the Commission had acted lawfully and that its stated aim of allowing for improved interoperability between systems manufactured by different companies was a valid one. Microsoft, by refusing to supply this information, was guilty of abusing its dominant position on the relevant market. None of Microsoft’s arguments were deemed to give sufficient guarantees that competition parity would be restored. Interoperability in markets, such as the one this case was concerned about, is a key tool to allow products to work better against each other and granting the necessary information to achieve this aim would facilitate innovation by rivals rather than hinder it.

The Commission in reaching its final conclusions took into account the strictest legal test applicable that was the most favourable to Microsoft. Namely, the Commission assumed that Microsoft indeed had some intellectual property rights to protect, despite the fact that Microsoft did not come up with sufficient information on this point. Following the judgment in IMS Health, four conditions need to be satisfied before a company may be forced to license its intellectual property rights. According to this case law, (1) the refusal must relate to a product or service that is indispensable in order to facilitate access to a neighbouring market; (2) the refusal to supply excludes any effective competition on that neighbouring market; (3) the refusal to supply blocks the appearance of a new product for which there is potential consumer demand; and (4) the refusal cannot be objectively justified.

Despite Microsoft itself advancing the IMS Health case in support of its own position, it failed to convince the Commission or the CFI. As mentioned above, the failure of Microsoft to establish the viability of any alternative solutions, and its failure to disprove any of the four conditions taken from IMS, meant that it was found guilty of a breach of Article 82 EC Treaty, which condemns the abuse of a dominant position. The CFI agreed with the Commission’s reasoning and legal approach.

The tying aspect of the case

The CFI backed the Commission’s decision that the marketing by Microsoft of a combined package containing the Windows PC operating system and Windows Media Player restricted consumers’ freedom of choice and gave Microsoft an unparalleled competitive advantage in the media player market.

Microsoft failed to give valid objective justifications for tying the two products together and failed to prove that its actions had not stifled competition in the market for media players.

However, evidence suggested that consumers want to, and do already, use alternative media players on their computers. Intriguingly, at first sight it could be considered that the fact that the Microsoft package includes an in-built media player may not confer as big an advantage on the company as first imagined. There is no suggestion that rival products are barred from entering the market or competing with WMP. Despite this, the Commission engaged in a much more sophisticated approach before concluding that Microsoft’s behaviour constitutes a form of illegal tying.

In this respect it must not be forgotten that tying practices are usually pro-competitive, leading to greater efficiencies and should not necessarily be condemned. However, what the Commission essentially argued in this case is that, due to Windows being pre-installed on more than 90% of PCs worldwide, the bundling of the media player to Windows gives the former an unparalleled presence. Thus, it creates a disincentive for Original Equipment Manufacturers and consumers to install and run alternative media players, despite the fact that this is feasible. Thus, the advantages in terms of distribution that Microsoft’s media players enjoy prevent rivals from competing effectively.

Moreover, the Commission argued that rivals are foreclosed because this type of Microsoft bundling induces content providers and software developers to use the Windows platform and create applications for this platform to the detriment of others.

Conclusion

Much debate now focuses on the wider implications that this landmark judgment will have. Whilst it has been acknowledged that more complaints in this area are likely to flow from the decision, what is also of particular importance is that this case has created a precedent for Microsoft itself. It cannot be overemphasised that this case was essentially based on factual analysis relating to very particular and specific circumstances that might not be applicable in all cases. However, Microsoft should be more careful in the future to avoid the potential of facing similar complaints being lodged against it. In fact, the very recent complaint against Microsoft, for allegedly tying Internet Explorer with Windows, is a strong example that the battle against this giant company may not be, after all, reaching an end. In addition, the latest EU fines levied against Microsoft for non-compliance with the 2004 Decision might be viewed as the largest ever imposed against a single company, but for Microsoft might not appear so high after all.

If the question we are being asked is whether this decision signifies a victory for free and fair competition, there is no clear-cut answer. Future cases dealing with companies who enjoy a quasi-monopolistic position in their market will give us a clearer indication of the progression of decisions such as the one taken in the Microsoft case. The strength of the Microsoft brand, in particular in relation to operating servers, means that market share and therefore competition within the market are unlikely to change drastically, even if Microsoft is a few Euros poorer. Having said that, the underlying issue here is that whoever controls the content also controls the market, behaviour similar to Microsoft’s will most likely alert not only the Commission, , but also competitors, both of which will certainly be willing to ensure that effective competition is not distorted in the future.