TechKnowledge No. 76

The EU Microsoft Ruling: A Welfare State for Aggrieved Market Losers

Triple jeopardy. That is the net effect of the European Union’s order imposing additional antitrust sanctions on the world’s leading software maker. Microsoft must pay about € 500m ($618m) in fines, disclose more of its programming code so that rivals’ server computers can more easily interact with Windows, and offer dual versions of Windows to personal computer makers in Europe — one version with Microsoft’s Media Player and one without.

Bite number one at the Microsoft apple came nearly six years ago when the Justice Department and 20 state attorneys-general filed their massive antitrust suit against the company. Thomas Penfield Jackson, the federal judge, held that Microsoft had misbehaved and recommended, among other things, that it be dismembered. But an appellate court had other ideas. It threw out the dismemberment scheme after finding that Mr Jackson himself had misbehaved. Nevertheless, it said, Microsoft did illegally maintain its Windows monopoly. A different federal judge, Colleen Kollar-Kotelly, was directed to come up with appropriate remedies. The result — 3 1/2 years after the initial filing — was a settlement between Microsoft, the Justice Department and all but nine of the states.

Before approving the settlement, Ms. Kollar-Kotelly took another year to consider more than 30,000 public comments, expert testimony and lots of advice from Microsoft’s supposedly victimized competitors. She decided that the public interest was best served by implementing the settlement, which essentially imposed two unprecedented restrictions on the company’s freedom to design and develop its own products. First, Microsoft had to allow PC makers and consumers to hide certain bundled Microsoft products — such as its Internet Explorer browser and Media Player — and install competing products. Second, Microsoft had to reveal parts of its software code to companies producing larger-scale server computers that “talk” to Windows-based PCs.

While the settlement approval process unfolded, the nine hold-out states opted for the second bite at the Microsoft apple. They decided to replace the US as the enforcer of federal antitrust laws and to seek broader relief than the federal settlement afforded. And they undertook that task at the behest of companies such as Sun Microsystems, which played a big role in the server market, and RealNetworks, which once ruled the market for multimedia software. In November 2002 Ms. Kollar-Kotelly rejected the nine states’ proposed remedies because they “would require drastic alterations to Microsoft’s products, as well as to aspects of its business model which do not involve illegal conduct”.

Now comes the EU with bite number three: tackling the very concerns that were first raised by the Justice Department, then later raised and rejected after separate hearings involving the non-settling states. Still, the EU ploughs ahead — second-guessing and overriding the judgment of both the judicial and executive branches of the US government in a matter that concerns management decisions made in the US by a US company. What is worse, the entire process has been instigated by US-based competitors that have failed repeatedly within the American legal system to accomplish what they have been inept at accomplishing within the global marketplace.

Microsoft tried to placate RealNetworks with a promise to have most PC makers worldwide install three competing media players. Even that was not enough. Mario Monti, the EU competition commissioner, wanted to make history, not settle the case. Although he conceded that there had been “substantial progress towards resolving the problems which have arisen in the past”, he wondered about Microsoft’s “future conduct” and concluded that “consumers in Europe will be better served with a decision that creates a strong precedent”. By contrast, Brad Smith, Microsoft’s general counsel, placed the emphasis where it properly belongs: “We have to be sure that the law is not just about competitors’ complaints. Consumers must be part of the equation.”

Far from promoting consumer interests, the latest EU order transforms antitrust regulation into a corporate welfare program for market losers. The implications will not be confined to the Microsoft case. Without some semblance of regulatory consistency, companies competing globally will not be able to satisfy the dictates of divergent legal regimes. That means special interests pursuing their favorite antitrust forum in an effort to exercise the most political clout. The real costs: fewer jobs, less innovation, inferior products and higher prices.

A version of this article was published in the Financial Times, March 24, 2004.

Robert A. Levy (rlevy [at] cato [dot] org) is senior fellow in constitutional studies at the Cato Institute in Washington, D.C. To subscribe, or see a list of all previous TechKnowledge articles, visit www.cato.org/tech/tk-index.html.