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

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Triple jeopardy. That is the net effect of the European Union'sorder imposing additional antitrust sanctions on the world'sleading software maker. Microsoft must pay about € 500m($618m) in fines, disclose more of its programming code so thatrivals' server computers can more easily interact with Windows, andoffer dual versions of Windows to personal computer makers inEurope -- one version with Microsoft's Media Player and onewithout.

Bite number one at the Microsoft apple came nearly six years agowhen the Justice Department and 20 state attorneys-general filedtheir massive antitrust suit against the company. Thomas PenfieldJackson, the federal judge, held that Microsoft had misbehaved andrecommended, among other things, that it be dismembered. But anappellate court had other ideas. It threw out the dismembermentscheme after finding that Mr Jackson himself had misbehaved.Nevertheless, it said, Microsoft did illegally maintain its Windowsmonopoly. A different federal judge, Colleen Kollar-Kotelly, wasdirected to come up with appropriate remedies. The result -- 3 1/2years after the initial filing -- was a settlement betweenMicrosoft, the Justice Department and all but nine of thestates.

Before approving the settlement, Ms. Kollar-Kotelly took anotheryear to consider more than 30,000 public comments, expert testimonyand lots of advice from Microsoft's supposedly victimizedcompetitors. She decided that the public interest was best servedby implementing the settlement, which essentially imposed twounprecedented restrictions on the company's freedom to design anddevelop its own products. First, Microsoft had to allow PC makersand consumers to hide certain bundled Microsoft products -- such asits Internet Explorer browser and Media Player -- and installcompeting products. Second, Microsoft had to reveal parts of itssoftware code to companies producing larger-scale server computersthat "talk" to Windows-based PCs.

While the settlement approval process unfolded, the ninehold-out states opted for the second bite at the Microsoft apple.They decided to replace the US as the enforcer of federal antitrustlaws and to seek broader relief than the federal settlementafforded. And they undertook that task at the behest of companiessuch as Sun Microsystems, which played a big role in the servermarket, and RealNetworks, which once ruled the market formultimedia software. In November 2002 Ms. Kollar-Kotelly rejectedthe nine states' proposed remedies because they "would requiredrastic alterations to Microsoft's products, as well as to aspectsof its business model which do not involve illegal conduct".

Now comes the EU with bite number three: tackling the veryconcerns that were first raised by the Justice Department, thenlater raised and rejected after separate hearings involving thenon-settling states. Still, the EU ploughs ahead -- second-guessingand overriding the judgment of both the judicial and executivebranches of the US government in a matter that concerns managementdecisions made in the US by a US company. What is worse, the entireprocess has been instigated by US-based competitors that havefailed repeatedly within the American legal system to accomplishwhat they have been inept at accomplishing within the globalmarketplace.

Microsoft tried to placate RealNetworks with a promise to havemost PC makers worldwide install three competing media players.Even that was not enough. Mario Monti, the EU competitioncommissioner, wanted to make history, not settle the case. Althoughhe conceded that there had been "substantial progress towardsresolving the problems which have arisen in the past", he wonderedabout Microsoft's "future conduct" and concluded that "consumers inEurope will be better served with a decision that creates a strongprecedent". By contrast, Brad Smith, Microsoft's general counsel,placed the emphasis where it properly belongs: "We have to be surethat the law is not just about competitors' complaints. Consumersmust be part of the equation."

Far from promoting consumer interests, the latest EU ordertransforms antitrust regulation into a corporate welfare programfor market losers. The implications will not be confined to theMicrosoft case. Without some semblance of regulatory consistency,companies competing globally will not be able to satisfy thedictates of divergent legal regimes. That means special interestspursuing their favorite antitrust forum in an effort to exercisethe most political clout. The real costs: fewer jobs, lessinnovation, inferior products and higher prices.

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