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Press Release

A Raw Deal

03/26/2004

The recent European Commission’s (EC’s) decision declaring Microsoft in violation of competition law will have long lasting effects in the technology marketplace. It sets a dangerous precedent for excessive government intervention in the marketplace. In fact, the EC intends to govern and regulate Microsoft’s future behavior, including what upgrades and innovations are permitted and how much source code it must share with competitors. The EC also recommends a record $613 million fine, the largest it has ever levied. While good news to a handful of competitors who stand to gain market share, the decision will slow innovation in the high technology sector while placing the interests of the consumers on the back burner.

The Microsoft case in Europe largely paralleled the U.S. antitrust case settled in November 2001. Both the United State’s Department of Justice and the EC accused Microsoft of taking advantage of its dominant market share in the software industry to unfairly integrate its own products with its Windows operating systems. The U.S. case focused on Microsoft’s integration of Internet Explorer with the Windows operating system. Similarly, the European case argued Microsoft’s inclusion of Media Player in its Windows operating system placed Microsoft’s competitors at a disadvantage. In the European antitrust case, the EC also alleged Microsoft has not provided its competitors with enough technical information, such as software code, to allow non-Microsoft products and services to operate smoothly within the Windows operating system. Should the EC ruling stand, the case threatens to change the way Microsoft and the entire software and high technology industry operates.

Mario Monti, the European Union’s Competition Commissioner, says the decision is what was “best for innovation and European consumers.” However, with innovation booming and prices falling for products and services in the high technology sector, the claim consumers were harmed by Microsoft’s practices is not convincing. How do falling prices and more innovative products and services hurt consumers? The high technology marketplace is filled with many companies offering competitive products that all compete with Microsoft by pushing to create better products and services. How additional government intervention will improve competition in the marketplace or benefit consumers has yet to be seen.

The EC’s decision is troubling in a variety of ways. First, the ongoing legal battle leaves the high tech sector in a mode of uncertainty. Microsoft executives have promised to appeal the Commission’s decision to Europe’s Court of First Instance in Brussels. Brad Smith, Microsoft’s general counsel, expects the case to take four to five additional years to work its way through the appeals process. With years of court appeals likely, producers are now left to wonder what the ultimate outcome of the case will be. With the final decision unknown, producers may be less willing to take risks in the development of new products and services. Microsoft must now focus time and money on lawyers and government bureaucrats instead of new products and services that benefit its customers. The consumer is cheated by the uncertainty.

Secondly, the EC’s decision adds much unwanted government regulation to one of the most dynamic sectors of the global economy. Government regulation slows innovation, which is particularly troubling in the high technology industry where product life-cycles are short and upgrades constant. The EC’s mandate will stymie innovation as producers are forced to comply with new regulatory requirements. The ruling gives the EC the power to tell producers what they can and cannot put in their own products. Settlement talks had actually broken down between the EC and Microsoft before the EC ruling because the EC insisted on the ability to restrict which features could be added to future versions of Windows. Only producers and consumers should make the decision of what features should be included in a product or service; having the government second-guess the decisions only hampers innovation. Making matters worse, regulation adds additional costs and makes products more expensive to the consumer. Poorer products and higher prices are not in the consumers’ interests.

Lastly, the EC’s decision sets a dangerous precedent. Producers who do not receive the legal remedies they desire in the U.S. courts can now plead their case in Europe for a second bite at the apple. In the Microsoft case, for example, it was Sun Microsystems, another American company, who brought suit in Europe. Courtroom competition does little for consumers, as producers vie for market share through legal barriers rather than better products. This sends an ominous message to all producers: Those who secure a large market share through hard work, superior products, and greater innovation will be punished. Competition will shift away from the consumer market and towards the courtroom.

The EC’s decision is a raw deal for both consumers and producers and places the desires of special interests above the desires of consumers in the marketplace. Consumer harm was never demonstrated in either the U.S. case or the case in Europe. Ideally, guiding policy should always be to protect the consumer, not allow a competitive advantage for one producer over another. Given the chance to protect consumers, the European Commission instead decided to give consumers the boot.