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EUROPE: Microsoft Ruling May Bode Ill for Other Companies

by Kevin J. O'Brien and Steve LohrNew York Times
September 18th, 2007

Europe’s second-highest court delivered a stinging rebuke to Microsoft Monday, but the impact of the decision upholding an earlier antitrust ruling may extend well beyond the world’s largest software maker to other high-technology companies.

Software and legal experts said the European ruling might signal problems for companies like Apple, Intel and Qualcomm, whose market dominance in online music downloads, computer chips and mobile phone technology is also being scrutinized by the European Commission.

“The decision is a strong endorsement for what in the United States would be considered aggressive policy on dominant firms,” said Andrew I. Gavil, a law professor at Howard University. “And that’s going to continue to play out in other kinds of cases.”

The 13-member European Court of First Instance, in a starkly worded 244-page summary, reaffirmed that Microsoft had abused its market power by adding a digital media player to Windows, undercutting the early leader, Real Networks.

It also ordered Microsoft to obey a March 2004 commission order to share confidential computer code with competitors. The court also upheld the record fine levied against the company, 497.2 million euros ($689.4 million).

But the court decision comes as the center of gravity in computing is shifting away from the software for personal computers, Microsoft’s stronghold. Increasingly, the e-mailing or word-processing functions of a computer can be performed with software delivered on a Web browser. Other devices like cellphones are now used as alternates to personal computers.

The real challenge to Microsoft, after more than a decade of dominating the technology industry, is coming not from the government, but from the marketplace.

The direct impact on Microsoft is small, said David B. Yoffie, a professor at the Harvard Business School. But there may be a longer-range consequence of having Microsoft under constant, open-ended scrutiny from Europe.

“If you end up handicapping a major player in new markets, you may actually not enhance competition but hinder it, and help create new monopolies,” Mr. Yoffie said. “The obvious example is Google in Internet search and Apple in digital music.”

Indeed, the Justice Department issued a statement expressing its concerns with the European decision, saying that tough restraints on powerful companies can be harmful. Thomas O. Barnett, assistant attorney general for the department’s antitrust division, said that the effect “rather than helping consumers, may have the unfortunate consequence of harming consumers by chilling innovation and discouraging competition.”

Consumer welfare, not protecting competitors, should be the guiding standard in antitrust, Mr. Barnett said.

Antitrust enforcement has often been criticized as too slow to grapple with fast-moving high-technology markets. Indeed, the media player market changed drastically during the years-long investigation in Europe. When the European Commission ordered Microsoft to offer a version of Windows in Europe without its media player, but at no difference in price, few people wanted the stripped-down version of Windows.

Still, the Luxembourg court’s ruling poses a threat to Microsoft’s traditional way of doing business by bundling new features and products into its Windows operating system. The court decision sets a precedent, at least from Europe. For example, if Microsoft wants to put handwriting- and speech-recognition features or stronger security software into Windows, European authorities might listen to competitors’ complaints.

In the United States, the Justice Department chose to settle the Microsoft antitrust case in 2001 without challenging the company’s freedom to put whatever it wants in its operating system.

Microsoft’s allies said the court’s decision would have a chilling effect on the business strategies of many global technology companies.

“This ruling is certainly going to introduce a lot of uncertainty,” said Jonathan Zuck, president of the Association for Competitive Technology, a Washington-based group that supported Microsoft in its legal case in Europe. “What the court is basically saying is that if you develop a successful product and get too big, the European Commission is going to force you to give away your intellectual property.”

The European ruling’s widest impact on technology companies, legal and industry experts say, will probably be on Microsoft’s ability to guard some of its intellectual property in software for servers. Server software, running on data center computers, powers corporate networks and the Web.

The court upheld the commission’s order that Microsoft must share technical information with competitors so their server software works smoothly with Microsoft’s Windows desktop.

The order applies only to Europe, but Microsoft may have a difficult time containing the impact to the European market only.

Because the Internet runs on server software, industry analysts say the court’s ruling could have a lasting impact.

“The Internet has opened a really good door for the industry and society to walk through to enjoy a far more rapid pace of innovation and growth than in personal computing, where Microsoft controls things,” said Timothy F. Bresnahan, an economist at Stanford University and a senior official in the Justice Department’s antitrust division during the Clinton administration. “Europe is pushing to ensure that the higher pace of innovation on the server is allowed to continue.”

Bradford L. Smith, the general counsel for Microsoft, who was present for the reading, said the company would follow the ruling but did not say specifically whether the company would appeal it. In a statement issued by the company, Mr. Smith said: “I would note that a lot has changed since this case started in 1998. The world has changed, the industry has changed, and our company has changed.”

The decision followed a five-day hearing on the issues under appeal in April 2006. Microsoft had indicated in the past that it would appeal any negative ruling to the European Court of Justice, the highest court in Europe. But an appeal by the company, a process likely to take at least two years, would focus only on whether the appellate court erred in procedure and points of law in reaching its decision, not on the facts in the case.

Neelie Kroes, the European Union competition commissioner, said at a news conference in Brussels that while the decision set an “important precedent,” the judgment “is bittersweet because the court has confirmed the commission’s view that consumers are suffering at the hands of Microsoft.”

In the course of the case, which began with a complaint in 1998, Ms. Kroes noted that Microsoft’s share of the market in server software has risen sharply and that Windows Media Player has come to dominate the market.

She highlighted the fact that Microsoft has 95 percent of the world market for desktop operating systems and said she would like to see this shrink. “You can’t draw a line and say exactly 50 percent is correct, but a significant drop in market share is what we would like to see,” she said. “Microsoft cannot regulate the market by imposing its products and its services on people.”




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