Microsoft: Different strokes

Date: 27/03/04

Is the EU ruling against Microsoft merely a case of history repeating itself? Actually, no

STOP us if you've heard this one before. Microsoft, the world's largest software company, has been found guilty of abusing its monopoly. Its crime was to stifle competition by including (“bundling”) another of its programs with every copy of its Windows operating system, which is installed on over 90% of PCs - thus ensuring the ubiquity of Microsoft's program, and squeezing out its main rival. Regulators have proposed remedies to punish Microsoft; the company plans to appeal; the case will probably drag on for several more years.

All of this was true four years ago, and all of it is true again today. Last time around, Microsoft fell foul of American trustbusters when it used its monopoly to crush Netscape, a maker of web-browsing software. This time the ruling has come from Europe's competition authorities, after Microsoft used the same trick against RealNetworks, a maker of media-playback software. In the American case, the judge ordered Microsoft to be broken up. This punishment was overturned on appeal in 2001, in effect allowing Microsoft to continue to do business as usual. In Europe, the European Commission has imposed a €497m ($612m) fine, and has given Microsoft 90 days to produce a version of Windows with the media-playback functions removed (“unbundled”), so that PC makers can substitute rival software if they choose. But while its appeal is considered, Microsoft need do nothing, and it hopes that this punishment too will eventually be overturned.

So, is this merely history repeating itself? It may seem that way, but this time really is different, for the Commission's remedy is genuinely new. Because Microsoft's business model involves using its operating-system monopoly to expand into new markets by bundling new features into Windows, the best remedy would be the break-up originally proposed in America. Under current European law, Mario Monti, Europe's competition commissioner, cannot demand anything that dramatic. But he has asked for the next best thing: rather than breaking up Microsoft, he is attempting to break up Windows.

The logical conclusion of this approach is a kind of “a la carte” Windows, in which PC makers and their users are free to choose which bits of Windows they want to buy, and which they don't. Microsoft would still be able to sell a version of Windows with all the bells and whistles attached, but nobody would be obliged to buy it. Whether this approach can be made to work remains to be seen. But the fact that Microsoft is fighting this ruling tooth and nail - and even offered to include rival firms' media-players inside Windows instead - shows that it is deeply worried that it might work.

That highlights the key difference between the American and European cases. The eventual settlement in America was deliberately backward-looking, though it came too late to save Netscape. In the case of media-playback software, things are not quite so far advanced: RealNetworks has been overtaken by Microsoft, but is still alive and kicking. Mr Monti, however, is less interested in righting past wrongs than in preventing future ones. During settlement talks, he tried to get Microsoft to agree to a set of rules about which bits of Windows can be unbundled in future. It was failure to agree on this point that derailed the talks last week, and led to this week's ruling.

The next best thing

Microsoft's position is that software is such a complicated and fast-moving business that no set of rules on unbundling could possibly work. Instead, say company officials, each case should be treated individually. This, of course, conveniently allows Microsoft to continue to do as it pleases: it takes years for each case to work its way through the courts, and by then Microsoft's bundling has achieved the desired effect. The European Commission has realised this, and has tried to fashion a remedy that deals with the causes, rather than just the symptoms, of Microsoft's monopolistic practices.

A break-up of the entire firm would have been cleaner. Mr Monti's unbundling remedy will be difficult to apply, it may not survive an appeal, and it may not slow the Microsoft juggernaut even if it does. And yet, if competition is to be preserved and encouraged in the software industry, it is definitely worth a try.

Is the EU ruling against Microsoft merely a case of history repeating itself? Actually, the editorial argues, no.

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