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EU's Statement of Objections to Microsoft Monopoly

9/13/2001
Client Alert
The new Statement of Objections ("SO") issued by the European Commission ("the Commission") on August 30, - and the two-year investigation which preceded it - is an important milestone in the continuing efforts of antitrust authorities on both sides of the Atlantic to tackle the problem of Microsoft's massive monopoly power in large segments of the computer software market. The EU investigation constitutes an important "second front" in what is now becoming an epic confrontation between antitrust enforcers and one of the strongest monopolies of all time. The new SO anticipates impending major battles on Microsoft's new Windows XP offering and the Hailstorm/.Net project, which are of critical importance to Microsoft's bid to extend its market power into the Internet.

The Commission's legal theory is that Microsoft has infringed Article 82 of the EC Treaty by "abusing its dominant position" on the desktop operating system market in order to leverage that position into the low-end server market, where Microsoft's market position has grown very rapidly. The abusive conduct consists essentially of (i) denying interface and other technical information to other server software suppliers, thus preventing them from producing server software which can run effectively with new generations of Microsoft products, (ii) bundling Media Player into the operating system, which helps Microsoft to leverage its desktop monopoly into the low-end server operating system market, and (iii) Microsoft licensing practices which encourage customers to license Microsoft server as well as desktop products.

There are some significant differences between the Commission's approach, and that of the U.S. Department of Justice ("DOJ") following the D.C. Circuit Court of Appeals judgment of June 28, and the DOJ's recent announcement that it is dropping the Section 1 tying claim and will not seek structural remedies.

  • First, the Commission's approach focuses squarely on Microsoft's leveraging of its existing monopolies into new markets. Although, even following the new SO, the only market directly considered is the server market, the logic of the Commission's approach points directly and inexorably towards XP, the Hailstorm/.net initiatives, and Microsoft's plans to build market power on the Internet. While bundling is still an issue in the U.S. monopoly maintenance claim under Section 2, in the new SO it is cast as a weapon for achieving dominance in new markets. XP and Hailstorm/.net are replete with anticompetitive strategies, including not only software bundling but also tying/linkage with Microsoft Internet service products, and these are now likely to come under scrutiny, especially if there were to be a further complaint and investigation.
  • Second, the issue of remedies remains open in the EU procedure. If the Commission finds Microsoft guilty of infringing Article 82, it will probably impose a fine (in an amount not greater than 10% of Microsoft's annual worldwide revenues), and also order, or accept an undertaking from Microsoft to accept and implement, behavioural remedies. Following the introduction of the bundling accusation in the new SO, any behavioural remedy which dealt with bundling would inevitably have repercussions, not only for Windows 2000, but also for XP and all other future products which pose similar problems.
  • Finally, the possibility of structural remedies remains open in the EU case. Legally contentious and politically sensitive as this may appear, Microsoft's own market behaviour as it introduces new products and extends its market power into the server and Internet services markets may make the logic of such remedies - that some kind of breakup is the only remedy that will suffice to cause the infringing behavior to come to an end - increasingly hard to escape.

What happens next?

Microsoft now has two months to make a written submission rebutting the accusations of the SO; other interested parties will then have a short interval to comment on the SO and Microsoft's rebuttal. Late this year or early next, there will be a hearing at which all the parties can express their views to the Commission and the Advisory Committee of the Member States. Then it will be for the Commission to take a decision, which could be some time during the first half of 2002. More often than not, Commission decisions follow structure and content of the SO. In this case, an important role may be played, not only by the debate within the four corners of the EU proceeding, but also by what happens in the market place, as well, possibly, as what happens in the US proceeding. In any event, it seems likely that the decision will be a stage in a continuing struggle, and not its end.

Summary of the Two Cases

U.S. case (after DC Circuit Court of Appeals decision and DOJ announcement):

  • Legal basis: Section 2 of the Sherman Act.
  • Legal theory: maintenance of Microsoft's monopoly positions in the market for desktop operating systems.
  • Behaviors attacked:
    • Provisions in licenses to PC manufacturers which install Windows on new products which prohibit (i) removal of the Internet Explorer (IE) icon, (ii) the modification of the PC's initial boot sequence, and (iii) modification of the Windows desktop.
    • Technological bundling ("integration") of IE with the Windows PC operating system, in particular (i) removing IE from the "Add/Remove" program utility and (ii) commingling OS and browser code in the same files.
    • Agreements with Internet Access Providers requiring them to distribute Windows exclusively or on a preferential basis.
    • Agreements with independent software vendors providing incentives for them to use IE as the default browser for any software they develop with an HTML interface.
    • An agreement with Apple by which it distributed IE exclusively, in exchange for Microsoft's porting of the MS Office suite to the Apple OS.
    • Interfering with the development of Java as a cross-platform language/interface, by requiring software developers to use exclusively Microsoft's alternative Java Virtual Machine, engaging in various deceptive practices concerning Java, and threatening Intel so as to induce it to abandon development of Java-related products.
  • Next steps: the case has been remanded to a new trial judge to hold hearings and take a decision on the remedies for the theories summarized above. These theories are now deemed to have been adequately proved, but the trial judge may hear new evidence, including evidence on recent behavior of Microsoft, in considering what remedies to impose.
EU case:
  • Legal basis: Article 82 of the EC Treaty.
  • Legal theory: leveraging of Microsoft's monopoly position in the desktop operating system market into the market for low-end server software.
  • Behaviors attacked:
    • Denying interface and other technical information to other server software suppliers, thus preventing them from producing server software that can run effectively with new generations of Microsoft products.
    • Bundling Media Player into the operating system, which helps Microsoft to leverage its desktop monopoly into the low-end server operating system market.
    • Licensing practices which encourage customers to license Microsoft server as well as desktop products.
  • Next step: Microsoft and other interested parties make written submissions, and an "oral hearing" is held in late 2001 or early 2002. It is then for the Commission to take a decision.

A version of this article also appears in The Lawyer.