Microsoft and EC prepare for antitrust showdown

More than two years have passed since Europe’s top antitrust authority, the European Commission, found Microsoft guilty of monopoly abuse, fined it €497 million (NZ$981 million) and ordered it to change the way it sells software across the European Union.

The events that have happened in the technology industry during that time will feature prominently in Microsoft’s appeal against the antitrust ruling of 2004. They will also be used by the Commission, to defend its decision.

The Court of First Instance, Europe’s second-highest court, has set aside the whole of this week to hear the appeal, devoting two whole days to the two separate sides of the case, plus one day to debate Microsoft’s request for a reduction in the fine.

It’s a big deal for the Luxembourg-based court. General Electric and Honeywell’s appeal of the Commission decision to block their merger in 2001 was the most recent high profile hearing and that was over in just a day.

If luck is on Microsoft’s side, and the company succeeds in persuading Judge Bo Vesterdorf that its behaviour hasn’t harmed competition, then it will be able to continue with its profitable strategy of bundling new software features into its ubiquitous Windows operating system.

“At issue is whether companies can improve their products by developing new features,” Microsoft said in a statement. “There is healthy competition and interoperability in all the markets covered in this case and we will bring those facts to the court next week.”

Two years ago the Commission ordered the company to launch a second version of Windows with no Media Player (the company’s music and video playing program), attached.

Bundling Media Player into Windows put rival players, such as RealPlayer, made by RealNetworks, and QuickTime, from Apple Computer, at a competitive disadvantage, the Commission concluded.

Microsoft will cite Apple’s success with its iPod portable music player and iTunes, its music portal on the internet, as proof that competition and innovation in this sector of the software market is buoyant.

“The Commission’s theory was that the market would tip irreversibly in Microsoft’s favour if Media Player remained integrated into the operating system, but there’s no evidence of this happening,” says Jonathan Zuck, president of the Association for Competitive Technology, a trade group supporting Microsoft in court.

“The market is thriving,” he says. “Apple is doing very well and there’s a new media player called Flash, owned by software maker Adobe, which has a bigger market share than both Microsoft’s Media Player and QuickTime,” he says.

The Commission was unavailable to comment, but Thomas Vinje, a partner in the Brussels office of law firm Clifford Chance, who is representing one of the Commission’s key allies at the hearing, dismissed Microsoft’s interpretation of the facts.

ITunes is not, strictly speaking, a media playing program, he says. “There is some overlap with media players, but the arrival of iTunes hasn’t made any difference to the ability of media players such as RealPlayer to penetrate the market,” Vinje says.

According to Vinje, the media-playing market has already tipped in Microsoft’s favour, in the same way that the internet browser market did when Microsoft’s Internet Explorer crushed Netscape, a rival browser.

“Market developments have validated the Commission’s concerns,” Vinje says. “It is vital that the court confirms the Media Player decision because it provides a legal precedent that could be used to prevent Microsoft continuing its abusive bundling practices in future,” Vinje says.

The need for such a precedent is urgent, he says, as Microsoft plans to bundle several new features into its next generation of Windows, dubbed Vista, due to be launched at the beginning of next year.

Microsoft will argue that market developments since the 2004 antitrust ruling also undermine the second, separate side of the case concerning the ability of rival software companies to make programs that work smoothly with Windows, which runs over 90% of the world’s personal computers.

The Commission concluded that Microsoft was giving its own server software an unfair advantage and ordered the company to licence secret details about Windows to rivals, to allow them to make server software that interoperates properly with Windows.

In the past, the court has said that compulsory licensing of a firm’s intellectual property could only be justified when the information concerned is indispensable to the whole market.

“The Linux market is thriving, which shows that the information the Commission wanted Microsoft to reveal is not indispensable,” Zuck says. In addition to it being unnecessary, ordering Microsoft to licence this information “undermines intellectual property protection in Europe,” Zuck says.

Microsoft’s opponents will argue that the information is vital in order to create a level playing field for rivals in the server software market, and that the compulsory licensing order doesn’t infringe any of Microsoft’s intellectual property rights.

“Microsoft only started mentioning intellectual property rights once it was clear it would lose the case two years ago. It’s an after-the-facts strategy and I hope the judge will see [that],” Vinje says.