Claim and counter-claim

Microsoft is appealing against a European Commission ruling of 2004 ordering changes in business practices and imposing a fine of €497 million.

The company was instructed to share sensitive data allowing rivals to compete in the market for servers.

The ruling also targeted the bundling of Windows Media Player (WMP) in Windows - a tactic that was said to have stifled competition in the market for software to play back music and film.

• Interoperability

The Commission’s investigation into interoperability issues began in 1998 with a complaint from Sun Microsystems. In the 2004 ruling, Microsoft was ordered to share protected code that allowed communication between workgroup servers and Windows PCs. Microsoft had allegedly built its dominant market position by hoarding the information needed for seamless network communication. ‘Complete and accurate’ data was to be licensed to rivals such as IBM at a reasonable cost.

Last year, the Commission decided that Microsoft had failed to comply with the ruling and fined the company an additional €280.5m for a six-month period spanning December 2005 to June 2006, a rate of €1.5m a day.

The Commission criticised Microsoft again this year, charging that the data provided was not innovative enough to justify the prices being proposed. The company could be liable for further daily fines if the Commission concludes that it is still not complying with the 2004 ruling.

Microsoft disputes the assertion that it has a dominant position on the market, claiming that IT companies such as IBM, Sun Microsystems, Hewlett-Packard, Novell and Red Hat "compete vigorously" in the supply of server operating systems.

The code it is being obliged to provide, it says, is protected by patents and trade secrets. Institutional disregard for intellectual property rights, it claims, takes away all incentives for innovation. Sharing protected information will encourage companies to replicate Microsoft products, therefore leading to market sluggishness. The Commission’s interference will have a chilling effect on innovation as companies will be unaware of when they might be forced to issue compulsory licences.

Microsoft’s competitors

Microsoft’s competitors, represented by industry association ECIS (the European Committee for Interoperable Systems) and developers’ collective FSFE (the Free Software Foundation Europe), say that they need the ‘dictionary’ and the ‘grammar book’ that will allow them to compete on non-discriminatory terms. Innovative ideas, they assert, do not spring from the language itself, but rather from use of the language.

Far from fostering innovation, they say, Microsoft’s practices have meant that no companies are able to compete effectively on the operating system and server markets. Domination of the server market, achieved by fencing off the Windows operating system, has shrunk consumer choice.

• Bundling

In 2001, the Commission extended its probe into Microsoft’s practices to include concerns over the bundling of WMP with the Windows Operating System. In the 2004 ruling, Microsoft was ordered to offer a version of Windows without WMP. This would expand the market for alternative products and widen consumer choice.

In the appeal hearing at the Court of First Instance last year, Judge Bo Vesterdorf questioned the wisdom of the remedy, comparing the bundling of Windows and WMP to a car equipped with lighter and radio.

Microsoft says that the remedy proved to be a failure. Sales of the N Version operating system without WMP have amounted to less than 0.005% of total sales of Windows since the remedy entered into effect.

Dismal sales figures for N Version proved that Microsoft had been responding to consumer demand in its bundling of products, rather than forcing people to buy something they did not want.

Microsoft’s competitors

Rivals claim that N Version sold at the same price as the traditional Windows package with WMP. The incentives to buy N Version were therefore reduced.

The current ubiquity of WMP, they say, is self-perpetuating. Developers provide content relying on the most widespread technology, hence using the WMP format to encode content. Competing media players are unable to break into the market.

Microsoft is appealing against a European Commission ruling of 2004 ordering changes in business practices and imposing a fine of €497 million.