Competition in a fast changing world: EU vs Microsoft!

Microsoft's legal battle with Europe's competition regulator will reach a climax next week. The EU's Court of First Instance (CFI) will rule on Microsoft's appeal against the European Commission's €497 million fine for alleged abuses of its dominant position in the market of PC and server operating systems. The Luxembourg-based court will present its ruling on what will be the last working day for Bo Vesterdorf, the Court's President and the presiding judge in the Microsoft case.

Microsoft's legal wrangling with the EU began in the late 1990s when the US company Sun Microsystems filed a complaint with the European Commission that Microsoft had refused to supply it with the vital interface information that Sun required to ensure that the products it was developing could "talk" properly with Windows PC operating systems. In 2000 the European Commission, on its initiative, widened the case and accused Microsoft of practising unfair practices by "tying" its Windows Media Player to its operating system, therefore suggesting that Microsoft was further trying to stifle competition.

The Commission fined Microsoft in 2004. Microsoft and the Commission did try to find some sort of compromise but the affair has ended up before the Court of First Instance. So we are now some nine years after the facts. In the meantime, the IT industry has moved on. The market is far from being static, with new products, innovations and competitors propping up all the time. Think Google; a company, which when Sun Microsystems complained about Microsoft to the European Commission, was only three months old. Today, a mere nine years later Google is itself a giant dominant player in the media world with substantial online advertising revenues, owner of YouTube, an online video space service.

In the late 1990s Apple, who today dominates the market for online music and has created an economic niche for itself through its iconic iPod, was on the brink of bankruptcy.

Why all the commotion about this case? Apart from the fact that this is the EU's highest-profile antitrust case, next week's decision will define the union's stance on competition issues. Do markets need more regulations or should competition be unfettered?

The Commission has pointed out that because of the Microsoft's "tying" practice it is preventing other competing products from emerging.

According to the Commission once standardisation on Windows Media formats has occurred, third party media players will disappear from the market. One may question this logic as today there are various popular formats available on the market such as Quicktime, MP3 and MPEG among others. Content providers have also embraced multiple formats.

The Commission's decision demanding Microsoft to craft versions of its operating system that omitted the Windows Media Player was not welcomed by consumers. The so-called N version, an XP without the Windows Media Player, represented, according to Microsoft estimates, only 0.005 per cent of its XP operating system sales in Europe.

The second aspect of the Microsoft case consists of Microsoft's refusal to share several Windows protocols with competitors in order to enhance the interoperability between different systems such as desktops and central servers in order to access files, print, etc. Apart from the fact that originally Sun did not request protocols that Microsoft is now obliged to supply, interoperability in heterogeneous systems is today a reality in the market (and has been for a long time). The ability of diverse IT applications or systems to exchange and use information is a practical necessity. Consumers demand interoperability for the simple reason to reduce costs and complexity in meeting their IT needs. Interoperability is today a competitive market reality - take the example of Linux, who has increased its market share rapidly despite no access to the "indispensable" technology.

Whatever the CFI judgment will be, it will set precedents that will decide the behaviour of market leaders across Europe and define the European Commission's credibility and ability to shape the rules of fair competition in the fast-moving technology sector. The case has brought up the question whether a new philosophy is needed in applying antitrust to IT issues that are indeed non issues elsewhere. Firms in the IT sector might think twice when making investments required for innovation on the basis that rulings can be either reversed or that they are based on industry conditions which were set long time ago.