Microsoft: Windows à la carte

Date: 27/03/04

Might the European Commission's controversial new antidote to Microsoft's monopoly actually work?

HALF a billion euro? Forget about it. The headline-grabbing €497m ($612m) fine imposed by the European Commission on Microsoft this week is the least of the software giant's worries, for it makes that much profit every two weeks and is sitting on a cash pile nearly 100 times bigger. Far more worrying for Microsoft is the commission's demand that it produce, within 90 days, a version of its Windows operating system stripped of its media-playback capabilities. That sounds trivial, but it would set an important precedent that could be used to make Microsoft remove other bits from Windows in future. Hence Microsoft's recent strenuous efforts to negotiate a settlement to avoid this week's ruling, and its determination to have the ruling overturned on appeal. Allowing PC-makers to pick and choose which bits of Windows they want from an “a la carte” list of features is something Microsoft wants to avoid at all costs.

That is because Microsoft relies on the “bundling” of new features into Windows to protect its existing monopoly and to extend it into new areas. Windows is installed on over 90% of new PCs. So any feature Microsoft adds - a web browser, say, or a media player - quickly becomes ubiquitous. Rival products, such as Netscape's web browser or the RealNetworks media player, which must be installed separately, lose out. Microsoft crushed Netscape this way, and now the commission has ruled that Microsoft's “bundling” of its media player into Windows “is an example of a more general business model which deters innovation and reduces consumer choice in any technologies which Microsoft could conceivably take interest in and tie with Windows in the future.”

The next version of Windows, codenamed Longhorn, due in 2006, will include search, database and security add-ons, and will no doubt inspire new legal challenges. By making Microsoft “unbundle” its media player when asked to do so by PC-makers, who can then substitute an alternative, the commission's aim is both to level the playing field today and pave the way for further unbundlings in future.

So great is Microsoft's desire to preserve its ability to bundle that, during settlement talks with the commission, it even offered to include rival media players in Windows, rather than remove its own. But Mario Monti, Europe's competition commissioner, was less interested in winning yesterday's battles than in preventing tomorrow's misdeeds. Attempts to devise a voluntary set of rules to govern future unbundling failed, so Microsoft will now be legally compelled - subject to appeals - to unbundle its media player. This would constitute a big step towards an “a la carte” Windows. But would that actually work?

It might. If Microsoft's various add-ons were optional rather than compulsory parts of Windows, each one would have to compete on merit with rival alternatives. PC-makers could then differentiate themselves from each other by assembling different software bundles for specific markets. Indeed, to some extent, though it would never admit it, Microsoft has started down this path already: it sells several versions of Windows, including a basic version for home users, a more advanced “pro” version for business users, and specially modified versions for tablet computers, media centres and its Xbox games console. It also offers cut-down versions of Windows in some Asian markets.

Pick and choose

Strikingly, Microsoft also sells a version of Windows for use in “embedded” devices such as cash dispensers or supermarket tills. Firms that license this version of Windows can specify which features they want, or do not want. This undermines Microsoft's claim that Windows is a single product that stops working if any part is removed, says Dave Stewart, deputy general counsel for RealNetworks. It is notable, he says, that Microsoft lets licensees modify Windows in embedded markets where it is not dominant, but insists on bundling everything in markets where it is.

Yet there are several problems with the “a la carte” model. One difficulty, to continue with the restaurant analogy, lies in compiling the menu. It would be necessary to decide how to carve Windows up, and how much PC-makers ought to pay once they have decided which bits they want. So far, the commission has said merely that Microsoft should not be allowed to offer incentives to PC-makers to include its media player - in other words, the unbundled version must not cost more than the full version of Windows. Surely it should cost less.

Yet PC-makers might simply prefer to stick with the full version of Windows. Today they can do deals with Microsoft's rivals to add extra software to their PCs. Hewlett-Packard, for example, is to sell PCs with Apple's media-player software, and Dell ships RealNetworks' player on some of its computers. But in both cases, Microsoft's media player is still present. Why antagonise Microsoft by removing it, even if it were for a small cut in the price of Windows? Philip Lowe, the commission's director general of competition, notes that rival software firms already pay PC-makers to carry their software. In future, he says, they might insist that Microsoft's rival product be removed.

The scope of the commission's ruling is limited to the European market. But Thomas Vinje, a lawyer at Clifford Chance, which represented a consortium of Microsoft's opponents in the case, says that Europe is probably a big enough market to act as a laboratory in which to test the “a la carte” model. If it worked, PC-makers would probably be able to insist on the same terms worldwide. Hence the unease at Microsoft: if the commission's ruling is upheld on appeal and the unbundling of media player goes ahead, its current business model could start to unravel.

All this, of course, assumes that the remedy is not overturned. Microsoft says that it will appeal, and will also ask for the commission's remedies to be suspended while the appeal is underway. On past form, says John Kallaugher, an expert on comparative competition law at University College, London, and a partner at Latham & Watkins, a law firm, the decision on whether or not to suspend the remedies could come as early as June. The appeal itself would take several years, however. By then the media-player case may well have become moot, and Longhorn will probably have been released. But a ruling in the commission's favour could still shape future versions of Windows.

By rejecting Microsoft's offer to include rival media players in Windows, says Brad Smith, Microsoft's general counsel, the commission turned down an opportunity to “create a foundation to solve future issues”. Such an agreement, he says, would have demonstrated that future bundling disputes could be solved by negotiation, on a case-by-case basis. Of course, that would also leave Microsoft the option of spinning out negotiations indefinitely, to its own advantage. Recognising this, the commission has in effect taken a bold gamble, rejecting a solution to a specific problem now in the hope of establishing a general precedent for the future. If it can get its remedy to stick, there is an outside chance that it might be able to dent the mighty Microsoft monopoly.

Might the European Commission's controversial new antidote to Microsoft's monopoly actually work?

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